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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2004 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
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Commission file number 0-26946
INTEVAC, INC.
(Exact name of registrant as specified in its charter)
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California
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94-3125814 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
3560 Bassett Street
Santa Clara, California 95054
(Address of
principal executive office, including Zip Code)
Registrant’s telephone number, including area code:
(408) 986-9888
Securities registered pursuant to Section 12(b) of the
Act:
None
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Name of Each Exchange on Which Registered |
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none |
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Securities registered pursuant to Section 12(g) of the
Act:
Common Stock (no par value)
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by a check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange
Act). Yes þ No o
The aggregate market value of voting stock held by
non-affiliates of the Registrant, as of June 26, 2004 was
approximately $122,256,000 (based on the closing price for
shares of the Registrant’s Common Stock as reported by the
NASDAQ National Market System for the last trading day prior to
that date). Shares of Common Stock held by each executive
officer, director, and holder of 5% or more of the outstanding
Common Stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
On March 22, 2005, 20,299,505 shares of the
Registrant’s Common Stock, no par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Registrant’s Proxy Statement for the
2005 Annual Meeting of Shareholders are incorporated by
reference into Part III. Such proxy statement will be filed
within 120 days after the end of the fiscal year covered by
this Annual Report on Form 10-K.
TABLE OF CONTENTS
This Annual Report on Form 10-K contains forward-looking
statements, which involve risks and uncertainties. Words such as
“believes,” “expects,” “plans,”
“anticipates” and the like indicate forward-looking
statements. These forward-looking statements include comments
related to technology and market trends in the data storage,
hard disk drive and magnetic disk market; comments related to
technology and market trends in military and commercial markets
for low light sensors, cameras and systems; projected
seasonality and cyclicality in the market for our equipment
products; projected sales of hard disk drives and magnetic disks
for hard disk drives; our leadership position in magnetic disk
manufacturing equipment; projected customer requirements for new
capacity and for technology upgrades, such as for perpendicular
recording, to their installed base of magnetic disk
manufacturing equipment, as well as the ability of our products
to meet these requirements; extended sales cycles for our
equipment and military products; projected technology roadmaps
and deployment schedules for our military customers; expected
features, performance, costs, and competitive advantages of
products we are developing, including 200 Lean systems, LIVAR
® cameras and systems, NightVista®
cameras, cameras for military head mounted applications and
commercial markets and low light level sensors; establishing
relationships with development and distribution partners for our
imaging products; development of manufacturing systems for entry
into new markets not previously addressed by us, and the cost of
complying with government regulations. Our actual results may
differ materially from the results discussed in the
forward-looking statements for a variety of reasons, including
those set forth under “Certain Factors Which May Affect
Future Operating Results.”
PART I
Overview
We are the world’s leading provider of disk sputtering
equipment to manufacturers of magnetic media used in hard disk
drives and a developer and provider of leading technology for
extreme low light imaging sensors, cameras and systems. We
operate two businesses: Equipment and Imaging.
Our Equipment business designs, manufactures, markets and
services complex capital equipment which deposits, or sputters,
highly engineered thin-films onto magnetic disks used in hard
disk drives. We believe our systems represent approximately 60%
of the installed capacity of disk sputtering systems worldwide.
Our customers include the world’s leading manufacturers of
magnetic disks for hard disk drives, such as Hitachi Global
Storage Technologies, Komag, Maxtor and Seagate Technology. We
believe the rapid growth of digital data, the transition from
videocassette recorders to digital video recorders and the
growth of new consumer applications, such as personal video
recorders, video game consoles and MP3 players, along with new
technology advances in the industry, will provide us with a
significant growth opportunity.
Our Imaging business develops and manufactures electro-optical
sensors, cameras, and systems that permit highly sensitive
detection of photons in the visible and near infrared portions
of the spectrum, allowing vision in extreme low light
situations. We currently develop night-vision technology and
equipment for military and commercial applications. To date, our
revenues have been derived primarily from research and
development contracts funded by the U.S. government.
Applications for our imaging technology include sensors and
cameras for use in extreme low light situations and systems for
positive identification of targets at long range. More recently,
we began developing products for use in the commercial sector,
specifically the security, life science and physical science
markets.
Intevac was formed in 1990 and completed a leveraged buyout of a
number of divisions of Varian Associates in February 1991. The
technologies acquired from Varian formed the foundation for our
Equipment and Imaging businesses. We were incorporated in
October 1990 in California. Our principal executive offices are
located at 3560 Bassett Street, Santa Clara, California
95054, and our phone number is (408) 986-9888. Our Internet
home page is located at www.intevac.com; however the
information in, or that can be accessed through, our home page
is not part of this report. Our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to such reports are available,
free of
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charge, on or through our Internet home page as soon as
reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and Exchange
Commission.
“Intevac”, “LIVAR®,”
“D-STAR®,” and “NightVista®,”
among others, are our registered trademarks.
Equipment Business
Our Equipment business designs, manufactures, markets and
services complex capital equipment used in the sputtering, or
deposition, of highly engineered thin-films of material onto
magnetic disks which are used in hard disk drives. Hard disk
drives are the primary storage medium for digital data and
function by storing data on magnetic disks. These magnetic disks
are created in a sophisticated manufacturing process involving
many steps, including plating, annealing, polishing, texturing,
sputtering and lubrication.
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Storage Market Growth Drivers |
Data storage requirements have rapidly increased from kilobytes
for documents, to megabytes for audio and still images, to
gigabytes for video. Hard disk drives are the primary devices
used for storing and retrieving large amounts of digital data.
We believe there are a number of emerging trends and
applications that exploit these reduced storage costs and that
require storage intensive solutions.
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New consumer electronics applications, such as digital video and
audio recorders, video game platforms, emerging HDTV
applications and streaming video require significant digital
data storage capability. |
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Personal computers have evolved from devices operating simple
applications such as word processing, to powerful machines that
are capable of playing, recording and creating multimedia
content, such as images, audio and video. These capabilities
have driven the demand for new personal computers and increasing
requirements for data storage. TrendFocus estimates annual
personal computer unit growth of 12.2% over the period from 2003
to 2007. |
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Enterprise data storage requirements are increasing, as
regulations and other business factors require companies to
archive more information, such as documents and email.
Additionally, companies are transitioning from paper-based
storage to digital data-based storage and digital backup. |
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Certain traditional analog storage applications are
transitioning to digital hard disk-based storage. For example,
the video surveillance industry, including home security, law
enforcement, private security services, retail, transportation
and government agencies, is transitioning from analog video
tapes to digital hard disk storage. |
As a result of these and other storage applications, TrendFocus
expects the total number of units of all hard disk drives
shipped to grow from 261 million units in 2003 to
429 million units in 2007, or an annual growth rate of
13.2% .
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Hard Disk Drive Market Dynamics |
Areal Density Increasing. Areal density, the density of
information stored on magnetic disks, continues to increase.
Higher areal density allows more information to be stored on
each magnetic disk. Magnetic disk manufacturers compete by
increasing areal density, which enables them to provide more
data storage capacity at a lower cost per gigabyte.
Transition from Longitudinal to Perpendicular Recording.
Historically, magnetic disk manufacturers have been able to
increase the areal density of a disk by improving existing
longitudinal recording processes, a storage method where
magnetized data bits are parallel to the disk. However, in the
past few years, the rate of increase in areal density for
longitudinal recording processes has slowed, as the magnetized
data bits are packed closer and closer together, which increases
instability. In order to increase the rate of areal density
expansion, we believe the magnetic disk industry will transition
to perpendicular recording. In perpendicular recording the data
bits are oriented perpendicular to the plane of the disk, which
enables the bits to be recorded at a higher density than in
longitudinal recording.
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New Equipment Required for Perpendicular Recording. The
equipment that magnetic disk manufacturers purchased in the mid
to late 1990s could generally accommodate up to 12 process
steps, which was sufficient to enable improvements in areal
density using longitudinal recording. However, economically
producing disks capable of perpendicular recording may require
as many as 20 or more process steps. As a result, in order to
transition to perpendicular recording, disk manufacturers will
most likely need to replace or retool their existing disk
manufacturing equipment. We also believe that the additional
process steps available on these perpendicular capable systems
add process flexibility which may enable further increases in
the areal density on longitudinal media.
Consolidation of Equipment Suppliers. The supplier base
of disk sputtering equipment has consolidated. Beginning in
1995, many magnetic disk manufacturers undertook aggressive
expansion plans. The reduction in disks per drive combined with
these capacity expansions resulted in substantial excess disk
production capacity in the late 1990s through 2002. As a result,
even as total storage capacity of all hard disk drives shipped
increased from 1997 to 2003, disk manufacturers did not make
significant investments in new disk sputtering equipment. As a
result, of the four leading providers of disk sputtering
equipment, only two have delivered new equipment platforms
capable of perpendicular recording.
Industry Consolidation. Two types of companies purchase
magnetic disk sputtering equipment; vertically integrated
companies that manufacture both disks and the hard drives that
use the disks, and merchant suppliers that manufacture magnetic
disks for sale to hard disk manufacturers. These companies were
also adversely affected by the overcapacity of 1997 through
2002, and as a result, the industry underwent significant
consolidation. For instance, in 2001 Maxtor acquired
Quantum’s hard disk drive operations, and Fujitsu ceased
manufacturing hard disk drives for the personal storage market.
In 2002, IBM sold its hard disk drive business to Hitachi. In
2004, Showa Denko acquired Trace Storage Technology. This
consolidation has reduced the number of magnetic disk
manufacturers able to respond to any increasing demand for disks
for hard disk drives.
Return to Industry Growth. In 2004, hard disk drive
manufacturers produced approximately 301 million units, up
from 261 million units in 2003, according to TrendFocus.
According to TrendFocus, hard disk drive demand will reach
429 million units by 2007, an annual growth rate of 13.2%.
To meet increasing demands, magnetic disk manufacturers are
beginning to invest in new disk sputtering equipment that can
accommodate the additional process steps required for
perpendicular recording. For example, in 2004 one of the
industry leaders opened a major new media production facility
utilizing Intevac’s 200 Lean systems. To evaluate the
performance of competing disk sputtering equipment, magnetic
disk manufacturers consider the following criteria:
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Cost of Ownership. Cost of ownership of disk sputtering
equipment includes factors such as equipment price,
manufacturing yield, throughput, factory floor footprint and
uptime. A lower cost of ownership for disk sputtering equipment
is a key factor in lowering the manufacturer’s product cost. |
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Extendibility and Flexibility. We believe magnetic disk
manufacturers need sputtering equipment that can address the
needs of their evolving technology roadmaps. This equipment must
be capable of incorporating new process steps and technical
capabilities, including the processes needed for producing
magnetic disks capable of perpendicular recording. Additionally,
these manufacturers are improving longitudinal processes and
further developing the processes necessary for perpendicular
recording, and as a result, they demand a modular, flexible
system that supports process reconfigurations and expansions
with a minimum of effort. |
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Compatibility with Existing Equipment. We believe
magnetic disk manufacturers prefer to standardize their
processes around one or two disk sputtering equipment suppliers.
Once a disk manufacturer has selected a particular
supplier’s equipment, that manufacturer generally relies
upon that supplier’s equipment for much of its production
capacity and frequently will continue to purchase any additional
equipment from the same supplier. There are significant
economies of scale related to the use of a single platform in
product design, product qualification, manufacturing and support. |
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Long-term Commitment of Supplier. We believe magnetic
disk manufacturers need sputtering equipment providers that are
committed to meeting current and future technology requirements
and to supporting this equipment throughout its useful life. As
a result, magnetic disk manufacturers increasingly demand a
supplier with the stability and capability to be a long-term
technology partner. |
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Our Competitive Strengths |
We are the leading provider of disk sputtering equipment to
manufacturers of magnetic media used in hard disk drives. We
believe that our industry leadership is the result of the
following key competitive strengths:
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Broad Installed Base with Industry Leading Customers. Our
MDP-250 disk sputtering system gained wide acceptance in the
magnetic disk manufacturing industry and by the late 1990s was
being used in the manufacture of approximately half of the
magnetic disks used in hard disk drives worldwide. We believe
that there are approximately 105 legacy MDP-250 systems and 12
next generation 200 Lean systems currently in use in production
and research and development applications by customers such as
Fuji Electric, Hitachi Global Storage Technology, Komag, Maxtor,
Seagate and Showa Denko. We believe the majority of our active
customers are now utilizing most of their capacity and that
there is significant potential for these customers to both
resume adding capacity and to upgrade the technical capability
of their installed base to permit production of higher density
disks capable of perpendicular recording. |
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Technology Leadership with Modular Next Generation Advanced
Platform. In December 2003, we first delivered our
latest-generation disk sputtering system, the 200 Lean, which
provides significantly enhanced capabilities relative to our
installed base of MDP-250 systems. The 200 Lean provides higher
throughput from a smaller footprint, which enables more disks to
be manufactured per square-foot of clean-room space. The
flexible design of the 200 Lean allows rapid reconfiguration to
accommodate product changeovers and new disk technology. The
modular design of the 200 Lean also allows disk manufacturers to
add additional process steps, as advanced magnetic disk
technologies, such as perpendicular recording, are introduced. |
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Long-Term Commitment to Hard Disk Drive Industry. We have
been a hard disk drive equipment provider since 1991. We are one
of only two companies that have delivered next-generation disk
sputtering equipment that can support perpendicular recording.
We have continued to develop new technologies and introduced the
200 Lean disk sputtering system to meet the needs for additional
process steps necessary to economically produce magnetic disks
capable of perpendicular recording. In addition, our
headquarters are located in close proximity to many of our
customers’ hard disk drive development centers, and our
support center in Singapore services our customers’
Southeast Asia manufacturing facilities. |
Based on these competitive strengths, we believe that we are
well positioned to maintain and enhance our market leading
position in the disk sputtering equipment market. We believe our
new Intevac 200 Lean system accounts for the majority of
installed production capacity of next generation
perpendicular-capable systems.
We believe we can leverage our leadership position in disk
sputtering equipment to increase our sales to magnetic disk
manufacturers and apply our technology to new markets. The key
elements of our strategy are as follows:
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Become Preferred Solutions Provider in the Magnetic Disk
Industry. Our goal is to become a preferred solutions
provider to magnetic disk manufacturers. We believe that our 200
Lean provides our customers with an advanced modular platform
that can address their future disk sputtering needs. We believe
we can integrate additional capabilities into the 200 Lean, such
as automated handling of small-form-factor disks (disks of one
inch diameter or less). We believe we are also the leading |
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provider of disk lubrication equipment, the equipment that is
used to apply ultra-thin coatings of lubricant to magnetic disks
after sputtering. |
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Deliver Highest Customer Value Proposition. Our goal is
to maintain our leadership in advanced disk sputtering equipment
by providing flexible, extendable equipment with the lowest cost
of ownership. The 200 Lean’s modular design provides
customers the ability to reconfigure their disk manufacturing
systems for rapid technology shifts and evolving technology
roadmaps. The 200 Lean’s compact footprint and increased
throughput relative to the legacy MDP-250 systems enables
increased output per square foot of factory clean-room space. |
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Expand Consumables, Spare Parts and Service Offerings. We
plan to increase the sale of disk sputtering equipment
consumables, spare parts and service in order to increase our
revenue opportunity per customer. In addition, growing these
offerings will enable us to deepen and enhance our customer
relationships. We believe the expected revenue from these
offerings will help mitigate the impact of cyclical downturns in
the disk sputtering equipment business. We believe that the
close proximity of our service center in Singapore to a large
number of hard disk drive manufacturers’ facilities gives
us a competitive advantage. We are planning to add additional
support centers as required in order to maintain close proximity
to our customers’ media factories as they begin deployment
of 200 Lean systems. |
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Leverage Existing Technology into New Markets. In
addition to expansion within our existing customer base, we
intend to target other markets where we can apply our expertise
in complex manufacturing equipment. Our expertise includes the
ability to design and manufacture complex, highly automated
vacuum manufacturing systems. We are currently in the concept
and feasibility stage of developing a new manufacturing system
that addresses a market other than our traditional hard disk
drive manufacturing equipment market. We are devoting a
significant portion of our research and development resources to
this new system. If we conclude that this new system addresses a
sufficiently large market and that we can achieve significant
profitable market share, then we plan to manufacture and ship a
number of evaluation units to key customers. We do not expect
that these activities will result in any revenue during 2005 and
cannot accurately predict when, if ever, we will generate
significant revenue from these activities. |
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200 Lean Disk Sputtering System |
The 200 Lean is our latest generation disk sputtering system.
The 200 Lean provides significantly enhanced capabilities
relative to the installed base of approximately 105 MDP-250
systems. The 200 Lean provides higher throughput from a smaller
footprint in a flexible modular system, which enables more disks
to be manufactured per square-foot of factory floor space, and
is designed to lower overall cost of ownership.
The key features of the 200 Lean include:
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Modular Design. The 200 Lean’s modular design allows
our customers to accommodate any number of disk manufacturing
process steps required by their evolving technology roadmaps.
The 200 Lean consists of a front-end robotic module that loads
and unloads disks from the system, combined with any number of
four-station process modules. Typical configurations of the 200
Lean have from four to five of these four-station process
modules, which results in systems capable of 16 to 20 process
steps. Additional process modules can be easily added to already
installed systems. For example, a customer could buy a
three-module (12-station) 200 Lean to manufacture longitudinal
media and at a later date upgrade the system to a five-module
(20-station) system to manufacture perpendicular media. |
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Easy to Reconfigure. Magnetic disk manufacturers produce
many different designs that have short product life cycles,
leading to frequent reconfiguration of disk sputtering
equipment. The mechanical design and software control system of
the 200 Lean allows rapid reconfiguration of systems by our
customers. The 200 Lean is also easily reconfigured to process
disks with glass or aluminum substrates of varying diameters and
thicknesses. |
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Higher Throughput with Smaller Footprint. The 200 Lean
offers higher throughput (up to 800 disks per hour) and more
process stations in a more compact package than our previous
MDP-250 system. We believe that the 200 Lean has the highest
disk throughput per square foot of factory space for a system
capable of manufacturing perpendicular media. |
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High Availability. The 200 Lean is designed to operate
seven days a week, 24 hours a day with high availability.
The 200 Lean can be run continuously for a week or more between
preventative maintenance cycles. |
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Single Disk Processing. The 200 Lean processes each
individual disk sequentially through a series of single-disk,
vacuum-isolated, process chambers. “Single-disk”
processing assures that each individual disk follows an
identical path through the system, which leads to disk-to-disk
uniformity since each disk sees the same process conditions. The
vacuum-isolated “single-disk” process also eliminates
the disk-to-disk interaction that can occur in systems that
process more than one disk in each process chamber. |
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High-Vacuum Capability. The 200 Lean operates at
significantly better vacuum levels compared to the installed
base of MDP-250s. Better vacuum levels generally lead to
improved magnetic media performance. |
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Suite of Process Station Options. The 200 Lean offers a
wide range of process stations, providing capabilities such as
metal deposition, heating, cooling and carbon overcoating onto
both aluminum and glass disks. The 200 Lean is also easily
configurable to manufacture disks in a variety of diameters and
thicknesses. |
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MDP-250 Disk Sputtering System |
Intevac’s legacy MDP-250 system is the most widely used
disk sputtering system in world. We believe that the MDP-250 is
used to manufacture approximately half the magnetic disks used
in hard disk drives. The MDP-250 system offers a maximum of
twelve process stations.
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Equipment Business Sales and Marketing |
Our Equipment business sales are made primarily through our
direct sales force, although in Japan, we sell our products
through a distributor, Matsubo. The selling process for our
equipment products is a multi-level and long-term process,
involving individuals from marketing, engineering, operations,
customer service and senior management. The process involves
making samples for the prospective customer and responding to
their needs for moderate levels of machine customization.
Customers often require a significant number of product
presentations and demonstrations before making a purchasing
decision.
Installing and integrating new equipment requires a substantial
investment by a customer. Sales of our systems depend, in
significant part, upon the decision of a prospective customer to
replace obsolete equipment or to increase manufacturing capacity
by upgrading or expanding existing manufacturing facilities or
by constructing new manufacturing facilities, all of which
typically involve a significant capital commitment. After making
a decision to select our equipment, our customers typically
purchase one or more engineering systems to develop and qualify
their production process prior to ordering and taking delivery
of multiple production systems. Accordingly, our systems have a
lengthy sales cycle, during which we may expend substantial
funds and management time and effort with no assurance that a
sale of one or more will result.
The production of large complex systems requires us to make
significant investments in inventory both to fulfill customer
orders and to maintain adequate supplies of spare parts to
service previously shipped systems. In some cases we manufacture
subsystems and/or complete systems prior to receipt of a
customer order to smooth our production flow and/or reduce our
lead time. We maintain an inventory of spare parts at our
Singapore subsidiary to support our customers in Singapore and
Malaysia. We typically require our customers to pay for systems
in three installments, with a portion of the system price billed
upon receipt of an order, a portion of the system price billed
upon shipment, and the balance of the system price and any sales
tax due
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upon completing installation and acceptance of the system at the
customer’s factory. All customer product payments are
recorded as customer advances pending revenue recognition.
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Equipment Business Customers |
Our disk sputtering equipment customers include magnetic disk
manufacturers, such as Fuji Electric, Komag and Showa Denko and
vertically integrated hard disk drive manufacturers, such as
Hitachi Global Storage Technology, Maxtor and Seagate. The
majority of our customers’ product development programs are
located in the United States. Our customers’ manufacturing
facilities are located in California, Singapore, Malaysia, Japan
and Taiwan. In addition, Hitachi Global Storage Technology is
opening a new media facility in China.
Our customers’ business tends to be cyclical, with their
peak sales occurring during the second half of the year. As a
result, our customers have a tendency to order equipment for
delivery and installation by midyear, so that they have new
capacity in place for their peak production period. For example,
our third quarter 2004 revenues totaled $34.9 million, and
accounted for 50% of our revenues for the entire year of 2004.
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Equipment Business Customer Support |
We provide process and applications support, customer training,
installation, start-up assistance and emergency service support
to our equipment customers. We conduct training classes for our
customers’ process engineers, machine operators and machine
service personnel. Additional training is also given to our
customers during the machine installation. We have a subsidiary
in Singapore to support our customers in Southeast Asia. We are
planning to add additional support centers to maintain close
proximity to our customers’ factories as they deploy our
systems.
We generally offer a one year warranty on our equipment. In some
cases we market extended warranty periods beyond 12 months
to our customers. During this warranty period any necessary
non-consumable parts are supplied and installed without charge.
Our employees provide field service support primarily in the
United States, Singapore and Malaysia. In Japan, field service
support is provided by our distributor, Matsubo, supplemented by
our factory support. We and Matsubo stock consumables and spare
parts to support the installed base of systems. These parts are
generally available on a 24-hour per day basis.
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Equipment Business Competition |
The principal competitive factors affecting the markets for our
equipment products include price, product performance and
functionality, integration and manageability of products,
customer support and service, reputation and reliability. We
have historically experienced intense competition worldwide from
competitors including Anelva Corporation, Ulvac and Unaxis
Holdings, Ltd., each of which has sold substantial numbers of
systems worldwide. Anelva, Ulvac and Unaxis all have
substantially greater financial, technical, marketing,
manufacturing and other resources than we do. To our knowledge,
Intevac and Anelva are the only companies that have delivered
products that economically address the sputtering requirements
for manufacture of advanced perpendicular magnetic disks.
However, there can be no assurance that any of our competitors
will not develop enhancements to, or future generations of,
competitive products that offer superior price or performance
features or that new competitors will not enter our markets and
develop such enhanced products.
Given the lengthy sales cycle and the significant investment
required to integrate equipment into the manufacturing process,
we believe that once a magnetic disk manufacturer has selected a
particular supplier’s equipment for a specific application,
that manufacturer generally relies upon that supplier’s
equipment and frequently will continue to purchase any
additional equipment for that application from the same
supplier. Accordingly, competition for customers in the
equipment industry is intense, and suppliers of equipment may
offer substantial pricing concessions and incentives to attract
new customers or retain existing customers.
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Imaging Business
Our Imaging business develops and manufactures electro-optical
sensors, cameras, and systems that permit highly sensitive
detection of photons in the visible and near infrared portions
of the spectrum, allowing vision in extreme low light situations.
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Imaging Industry Overview |
Imaging is the capture and display of light or heat, emitted or
reflected from an object. A segment of the imaging market has
evolved into specialized technology for the capture of low light
images. Low light imaging involves the capture and display of
light at intensities of approximately one millionth, or less, of
daytime light levels.
The U.S. military has determined that low light imaging
technology which provides superior vision in nighttime combat
creates a significant tactical advantage. The U.S. military
funded the development of night vision technology, which has
evolved through three generations to today’s widely
deployed “Generation-III” night vision tubes.
Typically, Generation-III night vision tubes are placed in front
of a user’s eyes, like a pair of binoculars, and produce a
direct-view, “green glow” image. The military is now
funding the development of compact next generation extreme low
light imaging technology that also provides digital video output
The commercial sector has taken a different approach to extreme
low light imaging than the military. The initial extreme low
light cameras for the commercial sector were based on charged
coupled device, or CCD, technology, which is able to produce a
digital output. CCD technology relies on long exposure times for
its sensitivity, and as a result the initial cameras were used
for static applications, like astronomy. Other commercial
markets, such as metrology, life sciences and industrial process
monitoring, adopted CCD technology. However, cameras for these
new markets compromised sensitivity for dynamic applications
with motion or short measurement times.
As a result, two distinct forms of low light level imaging have
evolved: the Generation-III night vision tube technology
developed by the military, which provides direct-view analog
imagery; and CCD technology, which can provide digital imagery,
but is not well suited to dynamic applications.
We have developed imaging technology that combines the low light
capability of Generation-III night vision technology with
silicon-based digital video technology that we believe will
enable us to provide a family of portable, cost-effective low
light sensors and cameras. Elements of our proprietary solutions
include:
Advanced Photocathode Technology — A
photocathode is a semiconductor compound with the ability to
convert light into electrons. We are developing a family of
photocathodes that are engineered to optimize sensitivity at
specific wavelengths ranging from the visible (0.40 microns) to
the near infrared (1.65 microns). Our photocathodes have high
quantum efficiencies (the efficiency with which incoming light
photons are converted to electrons) and are extremely sensitive
to incoming light. Some of our detectors, incorporating such
photocathodes, can detect incoming light at levels as low as a
single photon, which is the ultimate level of sensitivity.
Use of Low Power CMOS Imaging Chips —
Historically, CCD sensors were the primary technology used in
digital imaging. Recently, Complementary Metal Oxide
Semiconductor, or CMOS sensors, which are generally lower cost
and require less power than comparable CCD sensors, have been
developed for consumer imaging applications. We have developed
proprietary technologies and capabilities to incorporate CMOS
sensors into our products to take advantage of these
improvements. As a result, we believe we will be able to offer
low cost, low power, extreme low light imaging sensors for
portable applications in price sensitive markets.
Increased Silicon Sensor Sensitivity — We have
developed proprietary technology to enable CMOS and CCD sensors
to capture the accelerated electrons emitted from the
photocathode more efficiently. Increasing the electron capture
efficiency directly increases extreme low light imaging
performance.
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Compact Ultra-High Vacuum Sensor Packaging —
Our compact ultra-high vacuum sensor package enables us to
combine an imaging chip with our photocathodes in a thin package
which is particularly well suited for portable applications
where size and weight are critical.
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Low Light Imaging Market Opportunity |
We are designing our imaging solutions to address next
generation military requirements and the dynamic applications of
the commercial markets. Forecast International estimated the
military market for legacy night vision systems and research
programs was $347 million in 2003.
Head Mounted Night Vision Systems —
Generation-III based night vision goggles, which have excellent
extreme low light imaging performance, were widely deployed by
the U.S. military for use by soldiers during the
1990’s. However, these goggles are relatively large, heavy
and lack video output. Additionally, potential adversaries are
now deploying Generation-II+ goggles manufactured outside the
United States with performance levels approaching that of
Generation-III. Accordingly, the U.S. Army has developed a
roadmap to maintain extreme low light imaging dominance for the
individual soldier. A key element of this roadmap includes a
transition from bulky direct-view night vision goggles to a
miniature head mounted imaging system, including an extreme low
light camera and video display. This approach addresses size and
weight issues and enables connectivity to a wireless network for
distribution of the imagery and other information. These
improvements need to be realized while minimizing the cost of
each soldier’s system. The U.S. Army plans to begin
deployment of this type of system by 2009.
Military Long Range Target Identification —
Current long-range nighttime surveillance systems are based on
expensive thermal imaging camera systems, which image the
thermal profile of a target. These systems produce relatively
poor resolution images since they only measure emitted heat.
Long range thermal systems are also relatively large, which is a
disadvantage for airborne and portable applications.
Accordingly, there is a need for a cost effective, compact,
long-range imaging solution that identifies targets at a
distance that is greater than an adversary’s detection
range capability.
Physical Sciences — Companies in the physical
sciences use extreme low light imaging to investigate the
chemistry and physics of a wide variety of substances such as
foods, medicines, materials and biological compounds. They need
high sensitivity and increased speed and resolution to increase
the accuracy of their measurements and the productivity of their
measurement tools.
Life Sciences — The life sciences market
focuses on increasing the understanding of biology at the
cellular level to improve health and quality of life. To image
single living cells this market needs extreme low light cameras
that operate at speeds significantly higher than cameras that
are available today.
Collaborate with Leading Development
Organizations — We collaborate with, and receive
significant funding from, leading government research
organizations for the development of our extreme low light
technology. These organizations strongly influence development
and procurement of advanced technologies by the
U.S. military. For example, we have collaborated with the
U.S. Army Night Vision Labs, the world leader in night
vision technology, to facilitate the development and adoption of
our night vision technology.
Become Leading Provider of Extreme Low Light Imaging
Technology for the Military — We are actively
marketing our extreme low light imaging technology to the
military. Our extreme low-light sensor was selected in 2004 for
use in digital head mounted system for the military of a NATO
ally. We believe this system, which is scheduled to begin
deployment in mid 2006, will be the first digital based military
head mounted low light system to be deployed on a large scale.
Our LIVAR technology has been incorporated into
U.S. weapons development programs such as the Airborne
Laser (“ABL”), the Cost Effective Targeting System
(“CETS”), and the Long-Range Identification System
(“LRID”) programs. Our objective is for our extreme
low light sensors to become the standard for military
head-mounted systems and for our LIVAR technology to become the
standard for long-range target identification.
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Leverage Proprietary Sensor and Camera Technology to Address
Emerging Commercial Markets — We are using our
extreme low light imaging expertise to develop products for
commercial markets. We believe the modular design of our
NightVista platform, coupled with our use of CMOS chips in our
configurable sensors, will help to decrease our development time
and cost to enter the physical and life sciences markets.
Lower Manufacturing Costs — The market for our
cameras and sensors is price elastic, and low cost manufacturing
will be critical to the rapid proliferation of our products. Our
use of low-cost CMOS sensors and development of wafer level die
manufacturing, as opposed to single die manufacturing, are
elements of our strategy to reduce product cost. Additionally,
we have developed proprietary ultra-high vacuum assembly
equipment to automate the assembly of the photocathode and the
imaging chip. In developing this system, we utilized our
expertise in the design and manufacture of complex, high
throughput production equipment. This system is designed to
decrease unit costs by increasing throughput and improving
process controls and yields.
Build Relationships with Strategic Sales Partners to
Accelerate Access to End Markets — We are focusing
on the development and manufacture of extreme low light sensors
and cameras. Our products are designed to be enabling technology
for larger systems. As a result, we are developing relationships
with leading systems manufacturers such as Boeing, Lockheed
Martin Corporation and Northrop Grumman Corporation, in the
military market, and distributors and value added resellers in
commercial markets.
NightVista Cameras — The NightVista camera is
an extreme low light CMOS-based day/night video camera for
security applications that currently offers VGA resolution. Its
camera body is small enough to fit into a two-inch cube, and its
power consumption is less than 2 watts. As a result, the
NightVista is well suited for portable battery-powered
applications.
LIVAR Camera and System Products — Our Laser
Illuminated Viewing and Ranging, or LIVAR, target identification
system consists of a near infrared extreme low light camera
integrated with an eye-safe laser illuminator. LIVAR uses a
laser to illuminate a target and a camera to capture the
reflected light and display an image. Our LIVAR system is
designed to identify targets initially detected by
forward-looking infrared or radar technology. Depending on the
application, LIVAR can be used to identify targets at distances
of up to 20 kilometers. We do not expect significant revenues
from deployment of LIVAR systems in 2005
Our Imaging business generally invoices its research and
development customers either as costs are incurred, or as
program milestones are achieved, depending upon the particular
contract terms. As a government contractor, we invoice customers
using estimated annual rates approved by the Defense Contracts
Audit Agency (“DCAA”). A majority of our contracts are
Cost Plus Fixed Fee (“CPFF”) contracts. On any CPFF
contract, 15% of the fee is withheld pending completion of the
program and DCAA’s annual audit of our actual rates. The
withheld portion of the fee is included in accounts receivable
until paid.
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Imaging Sales and Marketing |
Sales of our military products are made primarily through our
direct sales force. We are subject to long sales cycles because
many of our products, such as our LIVAR system, typically must
be designed into our customers products, which are often complex
state-of-the-art products. These development cycles are often
multi-year and our sales are contingent on our customer
successfully integrating our product into their product,
completing development of their product and then obtaining
production orders for their product. Sales of these products are
also often dependent on ongoing government funding of defense
programs by the U.S. government and its allies.
Sales of our commercial products, which have not been
significant to date, will be made through a combination of
system integrators, distributors and value added resellers and
can also be subject to long sales cycles. We also plan to market
some lower cost products, such as NightVista cameras, directly
to end users.
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Imaging Business Competition |
The principal competitive factors affecting our products include
price, extreme low light sensitivity, signal to noise ratio,
power consumption, resolution, size, integratability,
reliability, reputation and customer support and service. We
face substantial competition for our imaging products and many
of our competitors have greater resources than we do.
In the military market, ITT Industries and Northrop Grumman, who
are large and well-established defense contractors, are the
primary U.S. manufacturers of image intensifier tubes used
in Generation-III night vision devices and their derivative
products. Our extreme low light cameras are intended to displace
Generation-III night vision based products, and we expect that
ITT and Northrop Grumman will continue to enhance the
performance of their products and aggressively promote their
sales. Furthermore, CMC Electronics, DRS, FLIR Systems and
Raytheon manufacture cooled infrared sensors and cameras which
are presently used in long-range target identification systems,
with which our LIVAR target identification sensors and cameras
compete.
In the physical and life sciences market, companies such as
Andor, E2V, Hamamatsu and Roper Scientific offer competitive
products. In the security market, competitive products to our
NightVista camera based on electron multiplying CCDs and image
intensifier tubes are offered by a number of companies. Electron
multiplying CCDs manufactured by Texas Instruments and E2V also
are used in cameras that compete with our low light level
security products.
Manufacturing
We manufacture our Equipment products at our facility in
Santa Clara, California. Our equipment manufacturing
operations include electromechanical assembly, mechanical and
vacuum assembly, fabrication of sputter sources, and system
assembly, alignment and testing. We make extensive use of the
local supplier infrastructure serving the semiconductor
equipment business. We purchase vacuum pumps, valves,
instrumentation and fittings, power supplies, printed wiring
board assemblies, computers and control circuitry, and custom
mechanical parts made by forging, machining and welding. We also
have our own small fabrication center that supports our
engineering departments and makes some of the machined parts
used in our products.
We manufacture our Imaging products at our facilities in
Santa Clara, California and Fremont, California. Imaging
business manufacturing includes production of advanced
photocathodes and sensors, lasers, cameras and integrated camera
systems. We make extensive use of advanced manufacturing
techniques and equipment, and our operations include vacuum,
electromechanical and optical system assembly. We make use of
the supplier infrastructure serving the semiconductor, camera
and optics manufacturing industries. In manufacturing our
sensors, we purchase wafers, components, processing supplies and
chemicals. In manufacturing our camera systems, we purchase
printed circuit boards, electromechanical components and
assemblies, mechanical components and enclosures, optical
components and computers.
Intellectual Property
We currently hold 29 patents issued in the United States and 44
patents issued in foreign countries, and have patent
applications pending in the United States and foreign countries.
Of the 29 U.S. patents, 15 relate to our Equipment
business, and 14 relate to our Imaging business. Of the foreign
patents, 16 relate to our Equipment business, and 28 relate to
our Imaging business. In addition, we have the right to utilize
certain patents under licensing arrangements with Litton
Industries, Stanford University, The Charles Stark Draper
Laboratory and Alum Rock Technology. We hold substantial trade
secrets in the imaging area related to photocathode fabrication
and processing and to silicon chip packaging for vacuum
compatibility and high electron sensitivity. We also have
significant process integration intellectual property related to
vacuum packaging of a photocathode and a silicon semiconductor
chip.
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Customer Concentration
Historically, a significant portion of our revenue in any
particular period has been attributable to sales to a limited
number of customers. In 2004, Seagate and our Japanese equipment
distributor, Matsubo, each accounted for more than 10% of our
revenues, and in aggregate accounted for 73% of revenues. In
2003, Komag, Seagate, Lockheed Martin and Matsubo, each
accounted for more than 10% of our revenues, and in aggregate
accounted for 66% of revenues. In 2002, Seagate, Toppoly and the
U.S. Army Communications-Electronics Command each accounted
for more than 10% of our revenues, and in aggregate accounted
for 74% of revenues. Our largest customers change from period to
period, and it is expected that sales of our products to
relatively few customers will continue to account for a high
percentage of our revenues in the foreseeable future.
Foreign sales accounted for 68% of revenues in 2004, 64% of
revenues in 2003 and 52% of revenues in 2002. The majority of
our foreign sales are to companies in the Far East or to
U.S. companies for use in Far East operations. We
anticipate that sales to these international customers will
continue to be a significant portion of our Equipment revenues.
Employees
At December 31, 2004, we had 191 employees, including 17
contract employees. Of these 191 employees, 68 were in research
and development, 85 in manufacturing, and 38 in administration,
customer support and marketing. Of the 191 employees, 114 were
in the Equipment business, 50 were in the Imaging business, and
27 were in corporate.
Compliance with Environmental Regulations
We are subject to a variety of governmental regulations relating
to the use, storage, discharge, handling, emission, generation,
manufacture, treatment and disposal of toxic or otherwise
hazardous substances, chemicals, materials or waste. We treat
the cost of complying with government regulations and operating
a safe workplace as a normal cost of business and allocate the
cost of these activities to all functions, except where the cost
of those activities can be isolated and charged to a specific
function. The environmental standards and regulations
promulgated by government agencies in Santa Clara,
California and Fremont, California are rigorous and set a high
standard of compliance. We believe our costs of compliance with
these regulations and standards are comparable to other
companies operating similar facilities in Santa Clara,
California and Fremont, California.
Certain Factors Which May Affect Future Operating Results
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Our operating results fluctuate significantly from quarter
to quarter, which may cause the price of our stock to
decline. |
Over the last 8 quarters, our revenues per quarter have
fluctuated between $34.9 million and $4.6 million.
Over the same period our operating income as a percentage of
revenues has fluctuated between approximately 4% and (90%) of
revenues. We anticipate that our revenues and operating margins
will continue to fluctuate. We expect this fluctuation to
continue for a variety of reasons, including:
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delays or problems in the introduction and acceptance of our new
products, or delivery of existing products; |
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changes in the demand, due to seasonality and other factors, for
the computer systems, storage subsystems and consumer
electronics containing disks our customers produce with our
systems; and |
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announcements of new products, services or technological
innovations by us or our competitors. |
Additionally, because our systems are priced in the millions of
dollars and we sell a relatively small number of systems, our
business is inherently subject to fluctuations in revenue from
quarter to quarter due to factors such as timing of orders,
acceptance of new systems by our customers or cancellation of
those orders. For example, we do not currently anticipate
resuming volume system deliveries in our equipment business
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until the second quarter of 2005 although we recognized
significant revenue in the third quarter of 2004 as a result of
customer acceptance of eight 200 Lean systems and the sale of
one MDP-250 system. As a result, we believe that
quarter-to-quarter comparisons of our revenues and operating
results may not be meaningful and that these comparisons may not
be an accurate indicator of our future performance. Our
operating results in one or more future quarters may fail to
meet the expectations of investment research analysts or
investors, which could cause an immediate and significant
decline in the trading price of our common shares.
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If the projected growth in demand for hard disk drives
does not materialize and our customers do not replace or upgrade
their installed base of disk sputtering systems, then future
sales of our disk sputtering systems will suffer. |
From the middle of 1998 until mid-2003, there was very little
demand for new disk sputtering systems, as magnetic disk
manufacturers were burdened with overcapacity and were not
investing in new disk sputtering equipment. By 2003, however,
overcapacity had diminished, three of our customers announced
plans for major capacity expansions, and we shipped our first
next generation 200 Lean system. In 2004, one of those customers
took delivery of ten new 200 Leans and another of those
customers took delivery of a 200 Lean to evaluate its
capabilities.
Sales of our equipment for capacity expansions are dependent on
the capacity expansion plans of our customers and upon whether
our customers select our equipment for their capacity
expansions. We have no control over our customers’
expansion plans, and we cannot assure you that they will select
our equipment if they do expand their capacity. Our customers
may not implement capacity expansion plans, or we may fail to
win orders for equipment for those capacity expansions, which
could have a material adverse effect on our business and our
operating results. In addition, some manufacturers may choose to
purchase used systems from other manufacturers or customers
rather than purchasing new systems from us. Furthermore, if hard
disk drives were to be replaced by an alternative technology as
a primary method of digital storage, demand for our products
would decrease.
Sales of our new 200 Lean disk sputtering systems are also
dependent on obsolescence and replacement of the installed base
of disk sputtering equipment. If technological advancements are
developed that extend the useful life of the installed base of
systems, then sales of our 200 Lean will be limited to the
capacity expansion needs of our customers, which would have a
material adverse effect on our operating results.
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We have a recent history of significant losses and may not
regain annual profitability. If we do not establish profitable
operations in the future, then our share price is likely to
decline. |
The majority of our revenues and gross profit have historically
been derived from sales of disk sputtering equipment. Sales of
our disk sputtering equipment were severely depressed from the
middle of 1998 until mid-2003. Also, our Imaging business has
yet to earn an annual profit. We have experienced an operating
loss in each of the last five fiscal years. Our operating loss
in 2004 was $5.2 million, and as of December 31, 2004,
we had an accumulated deficit of $25.7 million. To regain
and sustain profitability, we will need to increase gross
margins and generate and sustain substantially higher revenue
while maintaining reasonable cost and expense levels. We cannot
assure you that we will regain profitability in the near future,
or at all, and if we do regain profitability we cannot assure
you that we will be able to sustain profitability on a
going-forward basis. If we fail to regain profitability within
the time frame expected by securities analysts or investors,
then the market price of our common stock will likely decline.
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We are exposed to risks associated with a highly
concentrated customer base. |
Historically, a significant portion of our revenue in any
particular period has been attributable to sales of our magnetic
media sputtering systems to a limited number of customers. In
2004, two of our customers, in the aggregate, accounted for 73%
of our revenues. Orders from a relatively limited number of
magnetic disk manufacturers have accounted for, and likely will
continue to account for, a substantial portion of our revenues.
The loss of, or delays in purchasing by, any one of our large
customers would significantly reduce potential future revenues.
The concentration of our customer base may enable customers to
demand pricing
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and other terms unfavorable to us. Furthermore, the
concentration of customers can lead to extreme variability in
revenue and financial results from period to period. For
example, during 2004 revenues ranged between $6.5 million
in the first quarter and $34.9 million in the third
quarter. These factors could have a material adverse effect on
our business, financial condition and results of operations.
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The majority of our future revenue is dependent on new
products. If these new products are not successful, then our
results of operations will be adversely affected. |
We have invested heavily, and continue to invest, in the
development of new products. Our success in developing and
selling new products depends upon a variety of factors,
including our ability to predict future customer requirements
accurately, technological advances, total cost of ownership of
our systems, our introduction of new products on schedule, our
ability to manufacture our systems cost-effectively and the
performance of our systems in the field. Our new product
decisions and development commitments must anticipate
continuously evolving industry requirements significantly in
advance of sales.
Our future revenues depend significantly on the market
acceptance of our 200 Lean disk sputtering system, which was
first delivered in December 2003. Initial builds of the 200 Lean
experienced high production and warranty costs in comparison to
our more established product lines. Although we believe our
margins will improve in the future on our 200 Lean systems, the
timing and amount of such improvements are difficult to predict.
Advanced vacuum manufacturing equipment, such as the 200 Lean,
is subject to extensive customer acceptance tests after
installation at the customer’s factory. These acceptance
tests are designed to validate reliable operation to
specification in areas such as throughput, vacuum level,
robotics, process performance and software features and
functionality. These tests are generally more comprehensive for
new systems, like the 200 Lean, than for mature systems, such as
the MDP-250, and are designed to highlight problems encountered
with early versions of the equipment. Failure to promptly
address any of the problems uncovered in these tests could have
adverse effects on our business, including rescheduling of
backlog, failure to achieve customer acceptance and therefore
revenue recognition as anticipated, unanticipated rework and
warranty costs, penalties for non-performance, cancellation of
orders, or return of products for credit.
We are making a substantial investment to develop a new
manufacturing system to address markets other than magnetic disk
manufacturing. Failure to correctly assess the size of the new
market, or to successfully develop a product to cost effectively
address the market, or to establish effective sales and support
of the new product would have a material adverse effect on our
future revenues and profits.
Our LIVAR target identification and low light level camera
technologies are designed to offer significantly improved
capability to military customers. We are also developing
commercial products based on the technology we have developed in
our Imaging business. None of our Imaging products is currently
being manufactured in high volume, and we may encounter
unforeseen difficulties when we commence volume production of
these products. Our Imaging business will require substantial
further investment in sales and marketing, in product
development and in additional production facilities in order to
expand our operations. We cannot assure you that we will succeed
in these activities or generate significant sales of these new
products. Failure of any of these products to perform as
intended, to penetrate their markets and develop into profitable
product lines or to achieve their production cost objectives,
would have a material adverse effect on our business.
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Demand for capital equipment is cyclical, which subjects
our business to long periods of depressed revenues interspersed
with periods of unusually high revenues. |
Our Equipment business sells equipment to capital intensive
industries, which sell commodity products such as disk drives.
When demand for these commodity products exceeds capacity,
demand for new capital equipment such as ours tends to be
amplified. Conversely, when supply of these commodity products
exceeds demand, the demand for new capital equipment such as
ours tends to be depressed. The hard disk drive industry has
historically been subject to multi-year cycles because of the
long lead times and high costs involved in adding capacity.
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The cyclical nature of the capital equipment industry means that
in some years we will have unusually high sales of new systems,
and that in other years our sales of new systems will be
severely depressed. The timing, length and volatility of these
cycles are difficult to predict. These changes have affected the
timing and amounts of our customers’ capital equipment
purchases and investments in new technology. For example, sales
of systems for magnetic disk production were severely depressed
from the middle of 1998 until mid-2003. In addition, our disk
manufacturing customers are generally more sensitive to the
cyclical nature of the hard disk drive industry, because many of
their customers have internal magnetic disk manufacturing
operations and will cut back their purchases of disks from
outside suppliers first in an industry downturn. If we fail to
anticipate or respond quickly to the industry business cycle, it
could have a material adverse effect on our business.
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We are required to evaluate our internal control over
financial reporting under Section 404 of the Sarbanes-Oxley
Act of 2002 and any adverse results from such evaluation could
result in a loss of investor confidence in our financial reports
and have an adverse effect on our stock price. |
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
(Section 404), beginning with this Annual Report on
Form 10-K for the fiscal year ended December 31, 2004,
we are required to furnish a report by our management on our
internal control over financial reporting. Such report contains,
among other matters, an assessment of the effectiveness of our
internal control over financial reporting as of the end of our
fiscal year, including a statement as to whether or not our
internal control over financial reporting is effective. This
assessment must include disclosure of any material weaknesses in
our internal control over financial reporting identified by
management. The report must also contain a statement that our
auditors have issued an attestation report on management’s
assessment of our internal controls.
The Committee of Sponsoring Organizations of the Treadway
Commission (COSO) provides a framework for companies to
assess and improve their internal control systems. Auditing
Standard No. 2 provides the professional standards and
related performance guidance for auditors to attest to, and
report on, management’s assessment of the effectiveness of
internal control over financial reporting under
Section 404. Management’s assessment of internal
controls over financial reporting requires management to make
subjective judgments, and, particularly because Section 404
and Auditing Standard No. 2 are newly effective, some of
the judgments will be in areas that may be open to
interpretation. Therefore the report is especially difficult to
prepare.
We were not able to assert, in our management certifications
filed with this Annual Report on Form 10-K, that our
internal control over financial reporting is effective as of
December 31, 2004, as our management identified three
material weaknesses in our internal control over financial
reporting. This or any future inability to assert that our
internal controls over financial reporting are effective for any
given reporting period (or if our auditors are unable to attest
that our management’s report is fairly stated or if they
are unable to express an opinion on the effectiveness of our
internal controls), could cause us to lose investor confidence
in the accuracy and completeness of our financial reports, which
would have an adverse effect on our stock price.
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Recently enacted and proposed changes in securities laws
and regulations will increase our costs. |
The Sarbanes-Oxley Act of 2002 has required changes in some of
our corporate governance, securities disclosure and/or
compliance practices. As part of the Act’s requirements,
the Securities and Exchange Commission has promulgated new rules
on a variety of subjects, in addition to other rule proposals,
and the NASDAQ Stock Market has enacted new corporate governance
listing requirements. These developments have and will continue
to increase our accounting and legal compliance costs, and could
also expose us to additional liability.
Costs of compliance were significantly larger in 2004 than
originally anticipated, and costs of compliance in future
periods may continue to be unpredictable, which could have an
adverse effect on our financial results. In addition, we were
unable to complete the efforts required in order to comply with
Section 404 in a timely
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manner this year, which impacted our ability to make a timely
filing of our Report on Form 10-K. There can be no
guarantee that we will not face similar issues in future filings.
In addition, such developments may make retention and
recruitment of qualified persons to serve on our board of
directors or executive management more difficult. We continue to
evaluate and monitor regulatory and legislative developments and
cannot reliably estimate the timing or magnitude of all costs we
may incur as a result of the Act or other related legislation or
regulation.
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Our products are complex, constantly evolving and often
must be customized to individual customer requirements. |
The systems we manufacture and sell in our Equipment business
have a large number of components and are highly complex, which
require us to make substantial investments in research and
development. If we were to fail to develop, manufacture and
market new systems or to enhance existing systems, that failure
would have an adverse effect on our business. We may experience
delays and technical and manufacturing difficulties in future
introduction, volume production and acceptance of new systems or
enhancements. In addition, some of the systems that we
manufacture must be customized to meet individual customer site
or operating requirements. In some cases, we market and commit
to deliver new systems, modules and components with advanced
features and capabilities that we are still in the process of
designing. We have limited manufacturing capacity and
engineering resources and may be unable to complete the
development, manufacture and shipment of these products, or to
meet the required technical specifications for these products,
in a timely manner. Failure to deliver these products on time,
or failure to deliver products that perform to all contractually
committed specifications, could have adverse effects on our
business, including rescheduling of backlog, failure to achieve
customer acceptance and therefore revenue recognition as
anticipated, unanticipated rework and warranty costs, penalties
for non-performance, cancellation of orders, or return of
products for credit. In addition, we may incur substantial
unanticipated costs early in a product’s life cycle, such
as increased engineering, manufacturing, installation and
support costs, that we may be unable to pass on to the customer
and that may affect our gross margins. Sometimes we work closely
with our customers to develop new features and products. In
connection with these transactions, we sometimes offer a period
of exclusivity to these customers. Any of these factors could
have a material adverse effect on our business.
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Our sales cycle is long and unpredictable, which requires
us to incur high sales and marketing expenses with no assurance
that a sale will result. |
The sales cycle for our equipment systems can be a year or
longer, involving individuals from many different areas of our
company and numerous product presentations and demonstrations
for our prospective customers. Our sales process for these
systems also includes the production of samples and
customization of products for our prospective customers.
Our Imaging business is also subject to long sales cycles
because many of our products, such as our LIVAR system, often
must be designed into our customers products, which are often
complex state-of-the-art products. These development cycles are
often multi-year and our sales are contingent on our customer
successfully integrating our product into their product,
completing development of their product and then obtaining
production orders for their product.
As a result, we may not recognize revenue from our products for
extended periods of time after we have completed development,
and made initial shipments of, our products, during which time
we may expend substantial funds and management time and effort
with no assurance that a sale will result.
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We operate in an intensely competitive marketplace, and
our competitors have greater resources than we do. |
In the market for our disk sputtering systems, we have
experienced competition from competitors such as Anelva
Corporation, which is a subsidiary of NEC Corporation and Unaxis
Holdings, Ltd, each of which has sold substantial numbers of
systems worldwide. Up to 1998, we also experienced competition
from Ulvac Technologies, Inc. In the market for our Imaging
products, we experience competition from companies such
16
as ITT Industries, Inc. and Northrop Grumman Corporation, the
primary U.S. manufacturers of Generation-III night vision
devices and their derivative products. Our competitors have
substantially greater financial, technical, marketing,
manufacturing and other resources than we do. We cannot assure
you that our competitors will not develop enhancements to, or
future generations of, competitive products that offer superior
price or performance features. Likewise, we cannot assure you
that new competitors will not enter our markets and develop such
enhanced products. Accordingly, competition for our customers is
intense, and our competitors have historically offered
substantial pricing concessions and incentives to attract our
customers or retain their existing customers.
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Our Imaging business depends heavily on government
contracts, which are subject to immediate termination and are
funded in increments. The termination of or failure to fund one
or more of these contracts could have a negative impact on our
operations. |
We sell many of our Imaging products and services directly to
the U.S. government, as well as to prime contractors for
various U.S. government programs. Generally, government
contracts are subject to oversight audits by government
representatives and contain provisions permitting termination,
in whole or in part, without prior notice at the
government’s convenience upon the payment of compensation
only for work done and commitments made at the time of
termination. We cannot assure you that one or more of the
government contracts under which we or our customers operate
will not be terminated under these circumstances. Also, we
cannot assure you that we or our customers would be able to
procure new government contracts to offset the revenues lost as
a result of any termination of existing contracts, nor can we
assure you that we or our customers will continue to remain in
good standing as federal contractors. The loss of one or more
government contracts by us or our customers could have a
material adverse effect on our operating results.
Furthermore, the funding of multi-year government programs is
subject to congressional appropriations, and there is no
guarantee that the U.S. government will make further
appropriations. The loss of funding for a government program
would result in a loss of anticipated future revenues
attributable to that program. That could increase our overall
costs of doing business and have a material adverse effect on
our operating results.
In addition, sales to the U.S. government and its prime
contractors may be affected by changes in procurement policies,
budget considerations and political developments in the United
States or abroad. The influence of any of these factors, which
are beyond our control, could also negatively impact our
financial condition. We also may experience problems associated
with advanced designs required by the government which may
result in unforeseen technological difficulties and cost
overruns. Failure to overcome these technological difficulties
and the occurrence of cost overruns would have a material
adverse effect on our business.
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|
We may not be successful in maintaining and obtaining the
necessary export licenses to conduct operations abroad, and the
United States government may prevent proposed sales to foreign
customers. |
Many of our Imaging products require export licenses from United
States Government agencies under the Export Administration Act,
the Trading with the Enemy Act of 1917, the Arms Export Act of
1976 and the International Trading in Arms Regulations
(“ITAR”). We can give no assurance that we will be
successful in obtaining all the licenses necessary to export our
products. Export to countries which are not considered by the
United States Government to be allies is also likely to be
prohibited. This limits the potential market for our products.
Failure to obtain, or delays in obtaining, or revocation of
previously issued licenses would prevent us from selling our
products outside the United States, may subject us to fines or
other penalties, and would have a material adverse effect on our
business, financial condition and results of operations.
|
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|
Our sales of disk sputtering systems are dependent on
substantial capital investment by our customers, far in excess
of the cost of our products. |
Our customers must make extremely large capital expenditures in
order to purchase our systems and other related equipment and
facilities. These costs are far in excess of the cost of our
systems alone. The
17
magnitude of such capital expenditures requires that our
customers have access to large amounts of capital and that they
be willing to invest that capital over long periods of time to
be able to purchase our equipment. The magnetic disk
manufacturing industry has not made significant additions to its
production capacity until recently. Some of our potential
customers may not be willing or able to make the magnitude of
capital investment required, especially during a downturn in
either the overall economy or the hard disk drive industry.
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|
Our stock price is volatile. |
The market price and trading volume of our common stock has been
subject to significant volatility, and this trend may continue.
During 2004, the closing price of our common stock, as traded on
The Nasdaq National Market, fluctuated from a low of $3.92 to a
high of $17.92 per share. The value of our common stock may
decline regardless of our operating performance or prospects.
Factors affecting our market price include:
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• |
our perceived prospects; |
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• |
variations in our operating results and whether we achieve our
key business targets; |
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| |
• |
sales or purchases of large blocks of our stock; |
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| |
• |
changes in, or our failure to meet, our revenue and earnings
estimates; |
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| |
• |
changes in securities analysts’ buy or sell recommendations; |
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| |
• |
differences between our reported results and those expected by
investors and securities analysts; |
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| |
• |
announcements of new contracts, products or technological
innovations by us or our competitors; |
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| |
• |
market reaction to any acquisitions, joint ventures or strategic
investments announced by us or our competitors; |
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| |
• |
our high fixed operating expenses, including research and
development expenses; |
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| |
• |
developments in the financial markets; and |
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• |
general economic, political or stock market conditions in the
United States and other major regions in which we do business. |
Recent events have caused stock prices for many companies,
including ours, to fluctuate in ways unrelated or
disproportionate to their operating performance. The general
economic, political and stock market conditions that may affect
the market price of our common stock are beyond our control. The
market price of our common stock at any particular time may not
remain the market price in the future. In the past, securities
class action litigation has been instituted against companies
following periods of volatility in the market price of their
securities. Any such litigation, if instituted against us, could
result in substantial costs and a diversion of management’s
attention and resources.
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|
Changes in existing financial accounting standards or
practices or taxation rules or practices may adversely affect
our results of operations. |
Changes in existing accounting or taxation rules or practices,
new accounting pronouncements or taxation rules, or varying
interpretations of current accounting pronouncements or taxation
practice could have a significant adverse effect on our results
of operations or the manner in which we conduct our business.
Further, such changes could potentially affect our reporting of
transactions completed before such changes are effective. For
example, we currently are not required to record stock-based
compensation charges to earnings in connection with stock
options grants to our employees. However, Financial Accounting
Standards Board (FASB) 123R, “Stock-Based
Payments” will require us to record stock-based
compensation charges to earnings for employee stock option
grants commencing in the third quarter of 2005. Such charges
will negatively impact our earnings.
18
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|
Our future success depends on international sales and the
management of global operations |
International sales accounted for 68% of total revenues in 2004.
We expect that international sales will continue to account for
a significant portion of our total revenue in future years. We
are subject to various challenges related to the management of
global operations, and international sales are subject to risks
including, but not limited to regional economic and political
conditions, challenges in staffing and managing foreign
operations, changes in currency controls, potentially adverse
tax consequences, difference in enforcement of intellectual
property rights and fluctuation in interest and currency
exchange rates. Any of these factors could have a material
adverse effect on our business and operating results.
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|
Our dependence on suppliers for certain parts, some of
them sole-sourced, makes us vulnerable to manufacturing
interruptions and delays, which could affect our ability to meet
customer demand. |
We are a manufacturing business. Purchased parts constitute the
largest component of our product cost. Our ability to
manufacture depends on the timely delivery of parts, components,
and subassemblies from suppliers. We obtain some of the key
components and sub-assemblies used in our products from a single
supplier or a limited group of suppliers. If any of our
suppliers fail to deliver quality parts on a timely basis, we
may experience delays in manufacturing, which could result in
delayed product deliveries or increased costs to expedite
deliveries or develop alternative suppliers. Development of
alternative suppliers could require redesign of our products.
Any or all of these factors could have a material adverse effect
on our business and operating results.
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|
Our business depends on the integrity of our intellectual
property rights. |
The success of our business depends upon integrity of our
intellectual property rights and we cannot assure you that:
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| |
• |
any of our pending or future patent applications will be allowed
or that any of the allowed applications will be issued as
patents; |
| |
| |
• |
any of our patents will not be invalidated, deemed
unenforceable, circumvented or challenged; |
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| |
• |
the rights granted under our patents will provide competitive
advantages to us; |
| |
| |
• |
any of our pending or future patent applications will issue with
claims of the scope that we sought, if at all; |
| |
| |
• |
other parties will not develop similar products, duplicate our
products or design around our patents; or |
| |
| |
• |
our patent rights, intellectual property laws or our agreements
will adequately protect our intellectual property or competitive
position. |
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Failure to protect our intellectual property rights
adequately could have a material adverse effect on our
business. |
We provide products that are expected to have long useful lives
and that are critical to our customers’ operations. From
time to time, as part of business agreements, we place portions
of our intellectual property into escrow to provide assurance to
our customers that our technology will be available to them in
the event that we are unable to support them at some point in
the future.
From time to time, we have received claims that we are
infringing third parties’ intellectual property rights. We
cannot assure you that third parties will not in the future
claim that we have infringed current or future patents,
trademarks or other proprietary rights relating to our products.
Any claims, with or without merit, could be time-consuming,
result in costly litigation, cause product shipment delays or
require us to enter into royalty or licensing agreements. Such
royalty or licensing agreements, if required, may not be
available on terms acceptable to us. Any of the foregoing could
have a material adverse effect on our business.
19
|
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|
Our business is based in Northern California, where
operating costs are high and competition for employees is
intense. |
Our U.S. operations are located in Santa Clara,
California and Fremont, California, where the cost of doing
business and recruiting employees is high. Failure to manage
these costs well could have a material adverse effect on our
operating results. Additionally, our operating results depend,
in large part, upon our ability to retain and attract qualified
management, engineering, marketing, manufacturing, customer
support, sales and administrative personnel. Furthermore, we
compete with similar industries, such as the semiconductor
industry, for the same pool of skilled employees. Failure to
attract and retain qualified personnel could have a material
adverse effect on our business.
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|
Business interruptions, such as earthquakes or other
natural or man-made disasters, could disrupt our operations and
adversely affect our business. |
Our operations are vulnerable to interruption by fire,
earthquake, power loss, telecommunications failure, unauthorized
intrusion and other catastrophic events beyond our control. Our
contingency plans for addressing these kinds of events may not
be sufficient to prevent system failures and other interruptions
in our operations that have a material adverse effect on our
business. Additionally, our suppliers’ suffering similar
business interruptions could have an adverse effect on our
manufacturing ability. If any natural or man-made disasters do
occur, our operations could be disrupted for prolonged periods,
which could have a material adverse effect on our business.
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Changes in demand caused by fluctuations in interest and
currency exchange rates may reduce our international
sales. |
Sales and operating activities outside of the United States are
subject to inherent risks, including fluctuations in the value
of the U.S. dollar relative to foreign currencies, tariffs,
quotas, taxes and other market barriers, political and economic
instability, restrictions on the export or import of technology,
potentially limited intellectual property protection,
difficulties in staffing and managing international operations
and potentially adverse tax consequences. We earn a significant
portion of our revenue from international sales, and there can
be no assurance that any of these factors will not have an
adverse effect on our ability to sell our products or operate
outside the United States.
We currently quote and sell the majority of our products in
U.S. dollars. From time to time, we may enter into foreign
currency contracts in an effort to reduce the overall risk of
currency fluctuations to our business. However, there can be no
assurance that the offer and sale of products denominated in
foreign currencies, and the related foreign currency hedging
activities, will not adversely affect our business.
Our principal competitor for disk sputtering equipment is based
in Japan and has a cost structure based on the Japanese yen.
Accordingly, currency fluctuations could cause the price of our
products to be more or less competitive than our principal
competitor’s products. Currency fluctuations will decrease
or increase our cost structure relative to those of our
competitors, which could lessen the demand for our products and
affect our competitive position.
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We routinely evaluate acquisition candidates and other
diversification strategies. |
We have completed a number of acquisitions as part of our
efforts to expand and diversify our business. For example, our
business was initially acquired from Varian Associates in 1991.
We acquired our gravity lubrication and rapid thermal processing
product lines in two acquisitions. We sold the rapid thermal
processing product line in November 2002. We also acquired our
RPC electron beam processing business in late 1997, and
subsequently closed this business. We intend to continue to
evaluate new acquisition candidates, divestiture and
diversification strategies. Any acquisition involves numerous
risks, including difficulties in the assimilation of the
acquired company’s employees, operations and products,
uncertainties associated with operating in new markets and
working with new customers, and the potential loss of the
acquired company’s key employees. Additionally,
unanticipated expenses, difficulties and consequences may be
incurred relating to the integration of technologies, research
and development, and administrative and other
20
functions. Any future acquisitions may also result in
potentially dilutive issuance of equity securities, acquisition-
or divestiture-related write-offs or the assumption of debt and
contingent liabilities. Any of the above factors could have a
material adverse effect on our business.
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We use hazardous materials and are subject to risks of
non-compliance with environmental and safety regulations. |
We are subject to a variety of governmental regulations relating
to the use, storage, discharge, handling, emission, generation,
manufacture, treatment and disposal of toxic or otherwise
hazardous substances, chemicals, materials or waste. If we fail
to comply with current or future regulations, such failure could
result in suspension of our operations, alteration of our
manufacturing process, or substantial civil penalties or
criminal fines against us or our officers, directors or
employees. Additionally, these regulations could require us to
acquire expensive remediation or abatement equipment or to incur
substantial expenses to comply with them. Failure to properly
manage the use, disposal or storage of, or adequately restrict
the release of, hazardous or toxic substances could subject us
to significant liabilities.
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Future sales of shares of our common stock by our
officers, directors and affiliates could cause our stock price
to decline. |
Substantially all of our common stock may be sold without
restriction in the public markets. Shares held by our directors,
executive officers and affiliates are subject to volume and
manner of sale restrictions, and as otherwise described in the
following sentence. We have an agreement with Foster City LLC
and Redemco LLC that gives Foster City and Redemco the right to
require us to file a registration statement on Form S-3,
registering the resale of all shares of our common stock held by
Foster City and Redemco. Sales of a substantial number of shares
of common stock in the public market or the perception that
these sales could occur could materially and adversely affect
our stock price and make it more difficult for us to sell equity
securities in the future at a time and price we deem appropriate.
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Anti-takeover provisions in our charter documents and
under California law could prevent or delay a change in control,
which could negatively impact the value of our common stock by
discouraging a favorable merger or acquisition of us. |
Our articles of incorporation authorize our board of directors
to issue up to 10,000,000 shares of preferred stock and to
determine the powers, preferences, privileges, rights, including
voting rights, qualifications, limitations and restrictions of
those shares, without any further vote or action by the
shareholders. The rights of the holders of our common stock will
be subject to, and may be adversely affected by, the rights of
the holders of any preferred stock that we may issue in the
future. The issuance of preferred stock could have the effect of
delaying, deterring or preventing a change in control and could
adversely affect the voting power of your shares. In addition,
provisions of California law could make it more difficult for a
third party to acquire a majority of our outstanding voting
stock by discouraging a hostile bid, or delaying or deterring a
merger, acquisition or tender offer in which our shareholders
could receive a premium for their shares or a proxy contest for
control of our company or other changes in our management.
We lease a 119,583 square foot facility in
Santa Clara, California. The two-story facility includes
offices, manufacturing, engineering labs and clean rooms. All of
our operations, with the exception of our Singapore customer
support office and a sensor fabrication facility, are housed at
the Santa Clara facility. In February 2004, we executed an
amendment to the lease for the Santa Clara facility which
extended the lease for five years. The lease for the
Santa Clara facility now expires in March 2012. We also
lease a facility of approximately 3,600 square feet in
Singapore to house the Singapore customer support organization.
This lease expires in March 2006. In January 2004, we entered
into a lease for a sensor fabrication facility. This
9,505 square foot facility is located in Fremont,
California. The lease for the Fremont facility expires in
February 2013. We operate with two full manufacturing shifts. We
believe that we have sufficient productive capacity to meet our
current needs.
21
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| Item 3. |
Legal Proceedings |
From time to time, we are involved in claims and legal
proceedings that arise in the ordinary course of business. We
expect that the number and significance of these matters will
increase as our business expands. Any claims or proceedings
against us, whether meritorious or not, could be time consuming,
result in costly litigation, require significant amounts of
management time, result in the diversion of significant
operational resources, or require us to enter into royalty or
licensing agreements which, if required, may not be available on
terms favorable to us or at all. We are not presently party to
any lawsuit or proceeding that, in our opinion, is likely to
seriously harm our business.
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| Item 4. |
Submission of Matters to a Vote of Security-Holders |
No matters were submitted to a vote of security-holders during
the fourth quarter of the fiscal year covered by this Annual
Report on Form 10-K.
EXECUTIVE OFFICERS AND DIRECTORS
Certain information about Intevac’s directors and executive
officers as of March 22, 2005 is listed below:
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| Name |
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Age | |
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Position |
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Executive Officers and Directors:
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Norman H. Pond
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66 |
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Chairman of the Board |
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Kevin Fairbairn
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51 |
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President, Chief Executive Officer and Director |
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Verle Aebi
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50 |
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President of Photonics Technology Division |
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Charles B. Eddy III
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54 |
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Vice President, Finance and Administration, Chief Financial
Officer, Treasurer and Secretary |
|
Luke Marusiak
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42 |
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Chief Operating Officer |
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David Dury(1)(3)
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56 |
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Director |
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Stanley J. Hill(3)
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63 |
|
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Director |
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David N. Lambeth(2)
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57 |
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Director |
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Robert Lemos(1)(2)
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64 |
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Director |
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Arthur L. Money(1)
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65 |
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Director |
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Other Key Officers:
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Kimberly Burk
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39 |
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Director, Human Resources |
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Stephen Gustafson
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33 |
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Director, Imaging Operations |
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Ralph Kerns
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58 |
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Vice President, Business Development, Equipment Products |
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Christopher Lane
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38 |
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Vice President and General Manager, Commercial Imaging Division |
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| (1) |
Member of Audit Committee |
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| (2) |
Member of Compensation Committee |
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| (3) |
Member of Nominating and Governance Committee |
Mr. Pond is a founder of Intevac and has served as
Chairman of the Board since February 1991. Mr. Pond served
as President and Chief Executive Officer from February 1991
until July 2000 and again from September 2001 through January
2002. Mr. Pond holds a BS in physics from the University of
Missouri at Rolla and an MS in physics from the University of
California at Los Angeles.
Mr. Fairbairn joined Intevac as President and Chief
Executive Officer in January 2002 and was appointed a director
in February 2002. Before joining Intevac, Mr. Fairbairn was
employed by Applied Materials from July 1985 to January 2002,
most recently as Vice-President and General Manager of the
Conductor Etch
22
Organization with responsibility for the Silicon and Metal Etch
Divisions. From 1996 to 1999, Mr. Fairbairn was General
Manager of Applied Materials’ Plasma Enhanced Chemical
Vapor Deposition Business Unit and from 1993 to 1996, he was
General Manager of Applied Materials’ Plasma Silane CVD
Product Business Unit. Mr. Fairbairn holds an MA in
Engineering Sciences from Cambridge University.
Mr. Aebi has served as President of the Photonics
Division since July 2000. Mr. Aebi served as General
Manager of the Photonics Division since May 1995 and was elected
as a Vice President of the Company in September 1995. From 1988
through 1994, Mr. Aebi was the Engineering Manager of our
night vision business, where he was responsible for new product
development in the areas of advanced photocathodes and image
intensifiers. Mr. Aebi holds a BS in physics and an MS in
electrical engineering from Stanford University.
Mr. Eddy has served as Vice President, Finance and
Administration, Chief Financial Officer, Treasurer and Secretary
since April 1991. Mr. Eddy holds a BS in engineering
science from the University of Virginia and an MBA from
Dartmouth College.
Mr. Marusiak joined Intevac as Chief Operating
Officer in April 2004. Before joining Intevac, Mr. Marusiak
was employed by Applied Materials from July 1991 to April 2004,
most recently as Senior Director of North American Operations.
Previously, Mr. Marusiak managed Applied Materials’
Field Operations in North America. Mr. Marusiak holds a
Bachelor’s in electrical engineering from Gannon University
and an MS in Teleprocessing Science from the University of
Southern Mississippi.
Mr. Dury has served as a director of Intevac since
July 2002. Mr. Dury is a co-founder of Mentor Capital
Group, a venture capital firm. From 1996 to 2000, Mr. Dury
served as Senior Vice-President and Chief Financial Officer of
Aspect Development, a software development firm. Mr. Dury
holds a BA in psychology from Duke University and an MBA from
Cornell University. He is also a director of Phoenix
Technologies Ltd.
Mr. Hill was appointed as a director of Intevac in
March 2004. Mr. Hill joined Kaiser Aerospace and
Electronics Corporation (“Kaiser”), a privately held
manufacturer of electronics and electro-optical systems, in 1969
and served as Chief Executive Officer and Chairman of both
Kaiser and K Systems, Inc., Kaiser’s parent company, from
1997 to 2000. Prior to his appointment as Chief Executive
Officer, Mr. Hill served in a number of executive positions
at Kaiser. Mr. Hill holds a BS in Mechanical Engineering
from the University of Maine and a Master of Engineering from
the University of Connecticut and has completed post graduate
studies at the University of Santa Clara business school.
He is also a director of First Aviation Services, Inc.
Dr. Lambeth has served as a director of Intevac
since May 1996. Dr. Lambeth has been Professor of both
Electrical and Computer Engineering and Material Science
Engineering at Carnegie Mellon University since 1989.
Dr. Lambeth was Associate Director of the Data Storage
Systems at Carnegie Mellon University from 1989 to 1999. Since
1988, Dr. Lambeth has been the owner of Lambeth Systems, an
engineering consulting and research firm. Dr. Lambeth holds
a BS in electrical engineering from the University of Missouri
and a Ph.D. in physics from the Massachusetts Institute of
Technology.
Mr. Lemos has served as a director of Intevac since
August 2002. Mr. Lemos retired from Varian Associates, Inc.
in 1999 after 23 years, including serving as Vice-President
and Chief Financial Officer from 1988 to 1999. Mr. Lemos
has a BS in Business from the University of San Francisco,
a JD in law from Hastings College and an LLM in law from New
York University.
Mr. Money has served as a director of Intevac since
October 2003. Mr. Money served as the Assistant Secretary
of Defense for Command, Control, Communication and Intelligence
(C3I) from October 1999 to April 2001. Prior to his Senate
confirmation in that role, he was the Senior Civilian Official,
Office of the Assistant Secretary of Defense (C3I) from February
1998. Mr. Money also served as the Chief Information
Officer for the Department of Defense from 1998 to 2001. From
1996 to 1998, he served as Assistant Secretary of the Air Force
for Research, Development and Acquisition. Prior to his
government service, Mr. Money was President of ESL Inc., a
subsidiary of TRW, from 1990 to 1995, and prior to 1990 he held
senior management positions with ESL Inc. and the TRW Avionics
and Surveillance Group. He is also a director of CACI
International, Essex Corporation, Intelli-Check, SafeNet, Inc.,
Silicon Graphics, Inc. and
23
Terremark Worldwide, Inc. Mr. Money holds an MS in
Mechanical Engineering from the University of Santa Clara
and a BS in Mechanical Engineering from San Jose State
University.
Ms. Burk has served as Human Resources Director
since May 2000. Prior to joining Intevac, Ms. Burk served
as Human Resources Manager of Moen, Inc. from 1999 to 2000 and
served as Human Resources Manager of Lawson Mardon from 1994 to
1999. Ms. Burk holds a BS in Sociology from Northern
Illinois University.
Mr. Gustafson has served as Director of Imaging
Operations since February 2003. Before joining Intevac in May
2002, Mr. Gustafson was employed by Applied Materials as a
Sr. Operations Manager in the Conductor Etch Organization.
Mr. Gustafson holds a BA in Humanities and an MS in
Industrial Engineering from San Jose State University.
Mr. Kerns joined Intevac as Vice President, Business
Development of the Equipment Products Division in August 2003.
Before joining Intevac, Mr. Kerns was employed by Applied
Materials from April 1997 to November 2002, most recently as
Managing Director for Business Development for the Process
Modules Group. Previously, Mr. Kerns was General Manager of
Applied Materials’ Metal Etch Division from 2000 to 2002.
From 1998 to 2000, Mr. Kerns was Senior Director for North
America Multinational Accounts and from 1997 to 1998, he was
General Manager of Applied Materials’ Dielectric Etch
Division. Mr. Kerns holds a BS in Chemistry from the
University of Idaho and a PhD in Theoretical Chemistry from
Princeton University.
Mr. Lane has served as General Manager of the
Commercial Imaging Division since he joined Intevac in July 2002
and was elected a Vice-President in February 2003. Before
joining Intevac, from 1990 to July 2002, Mr. Lane was
employed by Applied Materials, most recently as Director of
Engineering, CVD and Etch, in the Conductor Etch Organization.
Mr. Lane holds a BS in Mechanical Engineering, a MS in
Engineering Management and a MBA, all from California
Polytechnic State University at San Luis Obispo.
PART II
|
|
| Item 5. |
Market for Registrant’s Common Equity, Related
Shareholder Matters and Issuer Purchases of Equity
Securities |
Price Range of Common Stock
Our common stock is listed on The Nasdaq National Market under
the symbol “IVAC.” As of December 31, 2004, there
were approximately 132 holders of record of our common stock.
Because many of our shares of common stock are held by brokers
and other institutions on behalf of shareholders, we are unable
to estimate the total number of shareholders represented by
these record holders.
The following table sets forth the high and low closing sale
prices per share as reported on The Nasdaq National Market for
the periods indicated.
| |
|
|
|
|
|
|
|
|
|
| |
|
High | |
|
Low | |
| |
|
| |
|
| |
|
Fiscal 2003:
|
|
|
|
|
|
|
|
|
| |
First Quarter
|
|
$ |
5.07 |
|
|
$ |
3.52 |
|
| |
Second Quarter
|
|
|
6.87 |
|
|
|
3.75 |
|
| |
Third Quarter
|
|
|
9.95 |
|
|
|
6.72 |
|
| |
Fourth Quarter
|
|
|
17.35 |
|
|
|
9.70 |
|
|
Fiscal 2004:
|
|
|
|
|
|
|
|
|
| |
First Quarter
|
|
$ |
17.92 |
|
|
$ |
9.86 |
|
| |
Second Quarter
|
|
|
11.39 |
|
|
|
8.47 |
|
| |
Third Quarter
|
|
|
9.46 |
|
|
|
3.92 |
|
| |
Fourth Quarter
|
|
|
7.95 |
|
|
|
5.01 |
|
24
Dividend Policy
We currently anticipate that we will retain our earnings, if
any, for use in the operation of our business and do not expect
to pay cash dividends on our capital stock in the foreseeable
future.
|
|
| Item 6. |
Selected Consolidated Financial Data |
The following table presents our selected financial data and is
qualified by reference to, and should be read in conjunction
with, the consolidated financial statements of Intevac,
including the notes thereto, and Management’s Discussion
and Analysis of Financial Condition and Results of Operations,
each appearing elsewhere in this report.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Systems and components
|
|
$ |
61,326 |
|
|
$ |
27,738 |
|
|
$ |
27,625 |
|
|
$ |
43,599 |
|
|
$ |
30,074 |
|
| |
Technology development
|
|
|
8,289 |
|
|
|
8,556 |
|
|
|
6,159 |
|
|
|
7,885 |
|
|
|
5,975 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total net revenues
|
|
|
69,615 |
|
|
|
36,294 |
|
|
|
33,784 |
|
|
|
51,484 |
|
|
|
36,049 |
|
|
Cost of net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Systems and components
|
|
|
45,528 |
|
|
|
19,689 |
|
|
|
20,009 |
|
|
|
30,025 |
|
|
|
20,658 |
|
| |
Technology development
|
|
|
6,856 |
|
|
|
6,032 |
|
|
|
5,150 |
|
|
|
7,988 |
|
|
|
6,022 |
|
| |
Goodwill write-off
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,056 |
|
| |
Inventory provisions
|
|
|
1,375 |
|
|
|
743 |
|
|
|
1,316 |
|
|
|
3,716 |
|
|
|
6,323 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total cost of net revenues
|
|
|
53,759 |
|
|
|
26,464 |
|
|
|
26,475 |
|
|
|
41,729 |
|
|
|
34,059 |
|
|
Gross profit
|
|
|
15,856 |
|
|
|
9,830 |
|
|
|
7,309 |
|
|
|
9,755 |
|
|
|
1,990 |
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Research and development
|
|
|
11,580 |
|
|
|
12,037 |
|
|
|
10,846 |
|
|
|
14,478 |
|
|
|
10,576 |
|
| |
Selling, general and administrative
|
|
|
9,525 |
|
|
|
8,448 |
|
|
|
7,752 |
|
|
|
6,745 |
|
|
|
4,415 |
|
| |
Restructuring and other
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(638 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total operating expenses
|
|
|
21,105 |
|
|
|
20,485 |
|
|
|
18,598 |
|
|
|
21,223 |
|
|
|
14,353 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(5,249 |
) |
|
|
(10,655 |
) |
|
|
(11,289 |
) |
|
|
(11,468 |
) |
|
|
(12,363 |
) |
|
Interest expense
|
|
|
(55 |
) |
|
|
(1,787 |
) |
|
|
(2,981 |
) |
|
|
(2,912 |
) |
|
|
(3,033 |
) |
|
Interest income and other income, net
|
|
|
1,070 |
|
|
|
177 |
|
|
|
16,452 |
|
|
|
2,473 |
|
|
|
3,072 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(4,234 |
) |
|
|
(12,265 |
) |
|
|
2,182 |
|
|
|
(11,907 |
) |
|
|
(12,324 |
) |
|
Provision for (benefit from) income taxes
|
|
|
110 |
|
|
|
38 |
|
|
|
(6,592 |
) |
|
|
5,029 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(4,344 |
) |
|
$ |
(12,303 |
) |
|
$ |
8,774 |
|
|
$ |
(16,936 |
) |
|
$ |
(12,324 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income (loss)
|
|
$ |
(0.22 |
) |
|
$ |
(0.95 |
) |
|
$ |
0.73 |
|
|
$ |
(1.42 |
) |
|
$ |
(1.04 |
) |
| |
Shares used in per share calculations
|
|
|
19,749 |
|
|
|
12,948 |
|
|
|
12,077 |
|
|
|
11,955 |
|
|
|
11,803 |
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income (loss)
|
|
$ |
(0.22 |
) |
|
$ |
(0.95 |
) |
|
$ |
0.66 |
|
|
$ |
(1.42 |
) |
|
$ |
(1.04 |
) |
| |
Shares used in per share calculations
|
|
|
19,749 |
|
|
|
12,948 |
|
|
|
15,262 |
|
|
|
11,955 |
|
|
|
11,803 |
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$ |
42,034 |
|
|
$ |
19,507 |
|
|
$ |
28,457 |
|
|
$ |
18,157 |
|
|
$ |
38,403 |
|
|
Working capital
|
|
|
53,100 |
|
|
|
22,638 |
|
|
|
31,309 |
|
|
|
27,160 |
|
|
|
41,093 |
|
|
Total assets
|
|
|
79,622 |
|
|
|
55,975 |
|
|
|
60,298 |
|
|
|
60,165 |
|
|
|
83,936 |
|
|
Long-term debt
|
|
|
— |
|
|
|
— |
|
|
|
30,568 |
|
|
|
37,545 |
|
|
|
41,245 |
|
|
Total shareholders’ equity
|
|
|
69,375 |
|
|
|
30,869 |
|
|
|
10,545 |
|
|
|
1,408 |
|
|
|
17,804 |
|
25
|
|
| Item 7. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
The following discussion and analysis contains
forward-looking statements which involve risks and
uncertainties. Words such as “believes,”
“expects,” “anticipates” and the like
indicate forward-looking statements. These forward looking
statements include comments related to our projected revenue,
gross margin, operating expense, profitability, income tax
expense, effective tax rate, capital spending and cash balances;
the adequacy of our cash balances to fund our operations;
projected volatility in our financial results; projected
customer requirements for new capacity and technology upgrades
for our installed base of magnetic disk manufacturing equipment
and when, and if, our customers will place orders for these
products; projected change from period to period in the
customers, and location of customers, that constitute the
majority of our revenues; the length of development, marketing
and deployment cycles for military customers; Imaging’s
ability to proliferate its technology into major military
weapons programs and to develop and introduce commercial
products; and the timing of delivery and/or acceptance of our
backlog for revenue. Our actual results may differ materially
from the results discussed in the forward-looking statements for
a variety of reasons, including those set forth under
“Certain Factors Which May Affect Future Operating
Results” and should be read in conjunction with the
Consolidated Financial Statements and related Notes contained
elsewhere in this Annual Report on Form 10-K.
Overview
Our operations include two businesses, an Equipment business and
an Imaging business. The Equipment business designs,
manufactures, markets and services complex capital equipment
that deposits highly engineered thin films of material onto
disks used in hard disk drives. Our Imaging business develops
and manufactures electro-optical sensors, cameras and systems
that permit highly sensitive detection of photons in the visible
and near infrared portions of the spectrum, allowing vision in
extreme low light situations.
Equipment Business
In the early 1990s we developed a system, the MDP-250, to
deposit magnetic films and protective overcoats onto magnetic
disks used in hard disk drives. This system gained wide
acceptance and by the late 1990s was being used to manufacture
approximately half of the disks used in hard disk drives
worldwide. In late 2003, we introduced a new system, the 200
Lean. As of December 2004 we had delivered twelve 200 Lean
systems. We believe that there are a total of approximately 117
MDP-250 and 200 Lean systems currently in use in production and
research and development applications. The hard disk drive
industry has gone through significant consolidation, and there
are now only seven significant manufacturers of magnetic disks,
some of whom also manufacture hard disk drives. As a result of
an increasingly smaller number of customers and the high average
selling price of our products, our equipment revenues tend to be
volatile from quarter to quarter. In addition, our Equipment
business has historically been subject to capital spending
cycles. For example, in the period from 1995 through the middle
of 1998, we sold $300 million of disk manufacturing
equipment. In the period from the middle of 1998 thru 2003 our
disk equipment revenues averaged approximately $20 million
per year and consisted of the sale of a limited number of
systems, technology upgrades, parts and service for the
installed base of our systems. In 2004 our sales of disk
manufacturing equipment grew to approximately $60 million
as a result of sales of our new 200 Lean system.
We believe the majority of magnetic disk manufacturers are now
utilizing most of their capacity. We believe that the expected
introduction in 2005 of high density disks based on
perpendicular recording techniques will also require disk
manufacturers to significantly upgrade the technical capability
of their installed base of manufacturing equipment to
accommodate the additional number of process steps predicted to
be required by perpendicular recording technology roadmaps.
We also have historically manufactured both deposition and rapid
thermal processing equipment used in the manufacture of flat
panel displays. Since 2000, cumulative revenues from sales of
flat panel display manufacturing systems totaled
$36.5 million. In late 2002 we sold our rapid thermal
processing product line to Photon Dynamics of San Jose,
California. Since then, we have focused our sputtering equipment
efforts on disk manufacturing and have not taken orders for any
new flat panel display manufacturing systems.
26
Imaging Business
Our Imaging business develops and manufactures electro-optical
sensors, cameras and systems that permit highly sensitive
detection of photons in the visible and near infrared portions
of the spectrum, allowing imaging in extreme low light
situations. Our military products include extreme low light
sensors and cameras for use in short-to medium-range military
applications and LIVAR cameras and systems for positive target
identification at long range. The majority of the funding for
our Photonics Technology Division’s activities has
historically come from research and development contracts with
the United States Government and its contractors, with the
balance being funded internally. In 2004, we began working with
a foreign customer on the development of a low light camera for
use in that customer’s military head mounted system, which
our customer is under contract to deliver to the armed forces of
a NATO country. In 2004, we began delivering two standard
products, NightVista low light cameras and Model 400 LIVAR
cameras.
Developing advanced products for the military involves long
development cycles, as products move through successive
multi-year stages of technology demonstration, engineering and
manufacturing product development, prototype production and then
product deployment. Each stage in this process requires ongoing
government funding. To date, substantially all of our Imaging
business revenues has been derived from contract research and
development, rather than product sales. In July 2002, in order
to shorten the time to market and to increase the number of
markets for our imaging products, we began to fund development
of imaging products for commercial markets. Revenues from these
activities have not yet been significant.
Critical Accounting Policies
The preparation of financial statements and related disclosures
in conformity with accounting principles generally accepted in
the United States of America (“US GAAP”) requires
management to make judgments, assumptions and estimates that
affect the amounts reported. Note 2 of Notes to
Consolidated Financial Statements describes the significant
accounting policies used in the preparation of the consolidated
financial statements. Certain of these significant accounting
policies are considered to be critical accounting policies, as
defined below.
A critical accounting policy is defined as one that is both
material to the presentation of our financial statements and
requires management to make difficult, subjective or complex
judgments that could have a material effect on our financial
conditions and results of operations. Specifically, critical
accounting estimates have the following attributes: 1) We
are required to make assumptions about matters that are highly
uncertain at the time of the estimate; and 2) different
estimates we could reasonably have used, or changes in the
estimate that are reasonably likely to occur, would have a
material effect on our financial condition or results of
operations.
Estimates and assumptions about future events and their effects
cannot be determined with certainty. We base our estimates on
historical experience and on various other assumptions believed
to be applicable and reasonable under the circumstances. These
estimates may change as new events occur, as additional
information is obtained and as our operating environment
changes. These changes have historically been minor and have
been included in the consolidated financial statements as soon
as they become known. In addition, management is periodically
faced with uncertainties, the outcomes of which are not within
its control and will not be known for prolonged periods of time.
Many of these uncertainties are discussed in the prior section
entitled “Certain Factors Which May Affect Future Operating
Results.” Based on a critical assessment of our accounting
policies and the underlying judgments and uncertainties
affecting the application of those policies, management believes
that our consolidated financial statements are fairly stated in
accordance with US GAAP, and provide a meaningful presentation
of our financial condition and results of operation.
We believe the following critical accounting policies affect the
more significant judgments and estimates we make in preparing
our consolidated financial statements. We also have other key
accounting policies and accounting estimates related to the
collectibility of trade receivables, valuation of deferred tax
assets and prototype product costs. We believe that these other
accounting policies and other accounting estimates either
27
do not generally require us to make estimates and judgments that
are as difficult or subjective, or it is less likely that they
would have a material impact on our reported results of
operation for a given period.
Certain of our system sales with customer acceptance provisions
are accounted for as multiple-element arrangements. If we have
previously met defined customer acceptance levels with the
specific type of system, then we recognize revenue for the fair
market value of the system upon shipment and transfer of title,
and recognize revenue for the fair market value of installation
and acceptance services when those services are completed. We
estimate the fair market value of the installation and
acceptance services based on our actual historical experience.
For systems that have generally not been demonstrated to meet
product specifications prior to shipment, revenue recognition is
typically deferred until customer acceptance. For example, while
initial shipments of our 200 Lean system were recognized for
revenue upon customer acceptance during 2004, we expect that 200
Leans will be generally be recognized for revenue upon shipment
during 2005.
In some instances, hardware that is not essential to the
functioning of the system may be delivered after acceptance of
the system. In these cases, we estimate the fair market value of
the non-essential hardware as if it had been sold on a
stand-alone basis, and defer recognizing revenue on that value
until the hardware is delivered.
We perform best efforts research and development work under
various government-sponsored research contracts. These contracts
are a mixture of cost-plus-fixed-fee (“CPFF”) and firm
fixed-price (“FFP”). Revenue on CPFF contracts is
recognized in accordance with contract terms, typically as costs
are incurred. Revenue on FFP contracts is generally recognized
on the percentage-of-completion method based on costs incurred
in relation to total estimated costs. Provisions for estimated
losses on FFP research contracts are recorded in the period in
which such losses are determined.
Inventories are priced using standard costs, which approximate
first-in, first-out, and are stated at the lower of cost or
market. The carrying value of inventory is reduced for estimated
excess and obsolescence by the difference between its costs and
the estimated market value based on assumptions about future
demand. We evaluate the inventory carrying value for potential
excess and obsolete inventory exposures by analyzing historical
and anticipated demand. In addition, inventories are evaluated
for potential obsolescence due to the effect of known and
anticipated engineering change orders and new products. If
actual demand were to be substantially lower than estimated,
additional inventory adjustments would be required, which could
have a material adverse effect on our business, financial
condition and results of operation.
We provide for the estimated cost of warranty when revenue is
recognized. Our warranty is per contract terms and is typically
12 months from customer acceptance. We also sell extended
warranties beyond 12 months to some customers. We use
estimated repair or replacement costs along with our actual
warranty experience to determine our warranty obligation. We
exercise judgment in determining the underlying estimates.
Should actual warranty costs differ substantially from our
estimates, revisions to the estimated warranty liability would
be required, which could have a material adverse effect on our
business, financial condition and results of operations.
Results of Operations
Net revenues. Net revenues consist primarily of sales of
equipment used to manufacture magnetic disks, equipment used to
manufacture flat panel displays, related equipment and system
components, and contract research and development related to the
development of electro-optical devices and systems. Net revenues
totaled $69.6 million, $36.3 million and
$33.8 million in 2004, 2003 and 2002, respectively.
28
Equipment revenues totaled $60.5 million,
$26.7 million and $27.1 million in 2004, 2003 and
2002, respectively. The increase in Equipment revenues was the
result of the sale of eleven 200 Lean systems and two MDP-250
systems and an increase in revenue from disk equipment
technology upgrades and spare parts. During 2003, we sold two
disk sputtering systems and recognized revenue on upgrades to
five D-STAR® systems that were originally delivered in
2001. Equipment revenues declined slightly between 2003 and 2002
as a result of the closure of the fabrication center in 2002.
Net revenues for 2002 include $7.1 million of sales of
rapid thermal processing equipment, a product line we sold in
November 2002. Our fabrication center, which manufactured
machined parts, contributed sales to outside customers of
$604,000 in 2002. The fabrication center was closed in September
2002. We replaced the fabrication center with a smaller model
shop during 2003. The model shop manufactures engineering
prototypes and parts for use in our products.
The magnetic disk manufacturing industry has now consolidated
into a small number of large manufacturers. We believe that the
majority of our active customers now utilize most of their
capacity and that there is significant potential for these
customers to both resume adding capacity and to upgrade the
technical capability of their installed base to permit
production of high density disks for perpendicular recording
rather than the current longitudinal technology. In the past few
months we have responded to requests for quotes from five
customers related to delivery of the 200 Lean system. While
there is no guarantee that these customers will actually place
orders for new disk sputtering systems, our outlook for the
Equipment business in 2005 is positive and we expect our
revenues will grow relative to 2004.
Imaging revenues totaled $9.1 million, $9.5 million
and $6.7 million in 2004, 2003 and 2002, respectively. The
decrease in Imaging revenues was primarily the result of an
increase in cost-shared development programs, especially our
military head mounted display development activities. This
reduced the revenue we could generate per employee in Imaging.
Commercial sales of Imaging products increased in the fourth
quarter, with NightVista and LIVAR cameras delivered to a total
of 14 customers. In 2003, Imaging revenues increased due
primarily to an increase in revenues from contract research and
development and, to a lesser extent, increased revenue from the
sale of prototype products. In 2005, we expect the Imaging
business revenue to grow, with increases in both contract
research and development revenue and product revenue, although
we don’t anticipate our Imaging business will be profitable
in 2005. Substantial growth in future Imaging revenues is
dependent on proliferation of our technology into major military
weapons programs, the ability to obtain export licenses for
foreign customers, obtaining production subcontracts for these
programs and the successful launch of our commercial products.
Our backlog of orders at December 31, 2004 was
$10.5 million, as compared to a December 31, 2003
backlog of $43.3 million, and does not include orders for
new systems that we announced early in 2005. As of
March 21, 2005, we have announced new orders for nine 200
Lean systems and four MDP-250B systems. The $10.5 million
of backlog at December 31, 2004 consisted of
$5.6 million of Equipment backlog and $4.9 million of
Imaging backlog. The $43.3 million of backlog at
December 31, 2003 consisted of $40.5 million of
Equipment backlog and $2.8 million of Imaging backlog. The
decrease in Equipment backlog was primarily the result of the
recognition for revenue of eleven Intevac 200 Lean disk
sputtering systems that were in backlog at December 31,
2003. Most of our backlog at December 31, 2004 is scheduled
for either customer acceptance or delivery during 2005.
Significant portions of our revenues in any particular period
have been attributable to sales to a limited number of
customers. In 2004, Seagate and equipment sales through Matsubo,
our Japanese distributor, each accounted for more than 10% of
our revenues, and in aggregate accounted for 73% of revenues. In
2003, Komag, Seagate, Lockheed Martin and equipment sales
through Matsubo, each accounted for more than 10% of our
revenues, and in aggregate accounted for 66% of revenues. In
2002, Seagate, Toppoly and the U.S. Army
Communications-Electronics Command each accounted for more than
10% of our consolidated net revenues and in aggregate accounted
for 74% of consolidated net revenues. Our largest customers tend
to change from period to period.
International sales totaled $47.1 million,
$23.2 million and $17.5 million in 2004, 2003 and
2002, respectively, accounting for 68%, 64% and 52% of net
revenues. International revenues include products shipped to
overseas operations of U.S. companies. The increase in
international sales in 2004 over 2003 was
29
primarily due to an increase in net revenues from disk
sputtering systems. The increase in international sales in 2003
over 2002 was primarily due to an increase in net revenues from
disk system upgrades and components. Substantially all of our
international sales are to customers in the Far East. Our mix of
domestic versus international sales will change from period to
period depending on the location of our largest customers in
each period.
Gross margin. Cost of net revenues consists primarily of
purchased materials and costs attributable to contract research
and development, and also includes fabrication, assembly, test
and installation labor and overhead, customer-specific
engineering costs, warranty costs, royalties, provisions for
inventory reserves and scrap. Gross margin was 23%, 27% and 22%
in 2004, 2003 and 2002, respectively.
Gross margin in Equipment was 25%, 27% and 24% in 2004, 2003 and
2002, respectively. 2004 Equipment gross margin was adversely
impacted by costs incurred during the rapid production,
installation and start-up of the initial production run of 200
Lean systems, and by costs for scrap and rework and actual and
expected obsolescence, related primarily to design changes on
our 200 Lean system. This was partially offset by higher margins
on revenue from disk equipment technology upgrades and spare
parts. Equipment gross margin in 2003 improved over 2002 due
primarily to a reduction in inventory provisions and improved
absorption of manufacturing overhead due to an increase in
manufacturing volume late in the year. 2003 gross margin was
negatively impacted by poor margins achieved on the five D-STAR
deposition system upgrades and the sale of a used disk
sputtering system at a reduced price. Equipment gross margin in
2002 was favorably impacted by lower production costs and by a
reduction in inventory provisions, partially offset by the
under-absorption of manufacturing overhead due to low
manufacturing volume. We expect the gross margin for the
Equipment business to improve in 2005, primarily as a result of
cost reduction efforts undertaken on the 200 Lean system.
However, we had two high cost 200 lean systems in inventory at
year-end that were built during 2004 and are not expected to
achieve margins as high as the margins expected on systems
produced in 2005. Gross margins in the Equipment business will
vary depending on a number of factors, including product cost,
system configuration and pricing, factory utilization, and
provisions for excess and obsolete inventory.
Gross margin in Imaging was 9%, 26% and 11% in 2004, 2003 and
2002, respectively. 2004 Imaging gross margin was impacted by
our military head mounted display development program. The
initial phase of this program was partially funded by the US
Government and our NATO customer. The portion of this
cost-shared program being funded by Intevac is reported in cost
of sales, and as a result, this program made a negative
contribution to gross profit in 2004. Imaging gross margin
improved in 2003 over 2002 due to most of the revenue being
derived from fully funded, rather than cost-shared, research and
development contracts and from the sale of prototype products.
We expect Imaging gross margin to improve in 2005, relative to
2004, as the cost-sharing portion of the military head mounted
display development program was largely completed at the end of
2004, and revenue in 2005 will be derived primarily from fully
funded research and development contracts and to a lesser
extent, from the sale of products.
Research and development. Research and development
expense consists primarily of prototype materials, salaries and
related costs of employees engaged in ongoing research, design
and development activities for disk manufacturing equipment,
flat panel manufacturing equipment and Imaging products.
Research and development expense totaled $11.6 million,
$12.0 million and $10.8 million in 2004, 2003 and
2002, respectively, representing 17%, 33% and 32% of net revenue.
Research and development expenses declined in 2004 due to a
reduction in spending for Imaging products and flat panel
manufacturing equipment, partially offset by increased spending
for the development of disk manufacturing equipment and the
initiation of a project to develop a new Equipment product line.
The increase in research and development expense in 2003 was
primarily the result of higher spending for the 200 Lean
disk sputtering system and for commercial imaging products,
partially offset by decreased spending for flat panel products.
We expect that research and development spending in 2005 will
increase over 2004 as a result of two projects. In Equipment we
are constructing the first engineering prototype for our new
product line and the cost of this prototype will be charged to
research and development expense. In Imaging, we have
commissioned the design of a proprietary CMOS sensor for use in
our military low light level cameras.
30
Research and development expenses do not include costs of
$6.9 million, $6.0 million and $5.2 million in
2004, 2003 and 2002, respectively, related to contract research
and development, which are included in cost of net revenues.
Research and development expenses also do not include costs of
$248,000 and $309,000 incurred by us in 2003 and 2002,
respectively, and reimbursed under the terms of research and
development cost sharing agreements related to development of
disk manufacturing equipment.
Selling, general and administrative. Selling, general and
administrative expense consists primarily of selling, marketing,
customer support, financial and management costs and also
includes production of customer samples, travel, liability
insurance, legal and professional services and bad debt expense.
Domestic sales and international sales of disk manufacturing
products in Singapore, Malaysia and Taiwan are made by our
direct sales force, whereas other international sales of disk
manufacturing and other products are made by distributors and
representatives that provide services such as sales,
installation, warranty and customer support. We also have a
subsidiary in Singapore to support customers in Southeast Asia.
Selling, general and administrative expense totaled
$9.5 million, $8.4 million and $7.8 million in
2004, 2003 and 2002, respectively, representing 14%, 23% and 23%
of net revenue. The increase in 2004 was primarily the result of
increases in marketing and business development headcount and
Sarbanes-Oxley compliance activities, partially offset by a
reduction of surplus facility costs being recorded in selling,
general and administrative expense. The increase in 2003 over
2002 was primarily the result of $1.1 million of surplus
facility costs being recorded in selling, general and
administrative expense, partially offset by a reduction in
representative commissions paid. We expect that selling, general
and administrative expenses will increase in 2005 over the
amount spent in 2004 due primarily to a projected increase in
field offices, headcount, travel, Sarbanes-Oxley compliance
activities and employee benefit costs.
Interest expense. Interest expense consists primarily of
interest on our convertible notes and amortization of debt
issuance costs. Interest expense totaled $55,000,
$1.8 million and $3.0 million in 2004, 2003 and 2002,
respectively. The decrease in interest expense in 2004 was due
to the elimination of our convertible notes outstanding as a
result of the automatic conversion of our convertible notes due
2009 notes in the fourth quarter of 2003 and the repayment of
the remaining $1.0 million of our convertible notes due
2004 in March 2004. The decrease in interest expense in 2003 was
due to a reduction in the convertible notes outstanding, as a
result of both the exchange offer completed in 2002 and the
conversion of our 2009 notes. We expect our interest expense to
be insignificant in 2005.
Interest income and other, net. Interest income and
other, net totaled $1.1 million, $177,000 and
$16.5 million in 2004, 2003 and 2002, respectively.
Interest income and other, net in 2004 consisted of $390,000 of
dividends from 601 California Avenue LLC, $634,000 of interest
income on investments and $46,000 of early payment discounts and
other income. Interest income and other, net in 2003 consisted
of $390,000 of dividends from 601 California Avenue LLC, a
$287,000 gain on the sale of the rapid thermal processing
product line, $269,000 of interest income on investments and
$72,000 of early payment discounts and other income, partially
offset by $841,000 of expense related to the disposition of
fixed assets. Interest income and other, net in 2002 consisted
of $284,000 of interest income on investments, a
$15.4 million gain on the sale of the rapid thermal
processing product line, a $324,000 gain on the sale of fixed
assets, $390,000 of dividends from 601 California Avenue LLC and
$26,000 of early payment discounts and other income. We expect
interest income and other, net to increase in 2005 due primarily
to higher interest rates realized on our investments.
Provision for (benefit from) income taxes. In 2004, we
recorded income tax expense of $110,000, due primarily to the
recording of $115,000 of expense as a result of a claim we
received from the California Franchise Tax Board for a portion
of income tax credits we claimed in prior years, partially
offset by a net credit for taxes owed by our Singapore
subsidiary. Our net deferred tax asset totaled zero at
December 31, 2004, net of a $19.9 million valuation
allowance. We have substantial net operating loss carry-forwards
which can be used to limit the taxes paid in the future and to
reduce our effective tax rate to less than the statutory income
tax rates in effect.
31
In 2003, we recorded income tax expense of $38,000, due
primarily to foreign tax expense on income earned by our
Singapore subsidiary. Our net deferred tax asset totaled zero at
December 31, 2003, net of a $16.7 million valuation
allowance.
In 2002, we recorded an income tax benefit of $6.6 million.
This resulted from the enactment of the Job Creation and Worker
Assistance Act of 2002 which increased the length of time, from
two years to five years, over which losses incurred in 2001 and
2002 could be carried back against taxes paid in prior years. We
paid federal income taxes of approximately $5.2 million for
1996, $0.9 million for 1997 and $0.5 million for 1998.
Our federal tax returns, and any refunds resulting from them,
are subject to audit for three years from the date filed. Our
net deferred tax asset totaled zero at December 31, 2002,
net of a $12.1 million valuation allowance.
Liquidity and Capital Resources
Our operating activities in 2004 used cash of $9.4 million.
The cash used was primarily the result of the net loss incurred,
an increase in inventory and a decrease in customer advances,
partially offset by a decrease in accounts receivable and by
depreciation. Operating activities used cash of
$10.3 million in 2003. The cash used was primarily the
result of the net loss incurred and an increase in accounts
receivable, partially offset by an increase in customer
advances, a decrease in inventory and by depreciation. Operating
activities provided cash of $820,000 in 2002. The cash provided
was primarily a result of the refund of federal income taxes
paid in prior years, decreases in accounts receivable and
inventory, depreciation and amortization, partially offset by
the operating loss.
Our investing activities in 2004 used cash of $34.5 million
as the result of the purchase of investments and fixed assets.
Investing activities in 2003 used cash of $1.9 million as
the result of the purchase of fixed assets, which was partially
offset by additional proceeds from the sale of the rapid thermal
processing product line. Investing activities in 2002 provided
cash of $16.8 million as a result of the sale of the rapid
thermal processing product line and the sale of equipment, which
was partially offset by the purchase of fixed assets.
Our financing activities provided cash of $41.8 million in
2004 due to a public offering of our common stock and the sale
of our common stock through our employee benefit plans,
partially offset by the repayment of the remaining
$1.0 million of our convertible notes due 2004. Financing
activities provided cash of $3.2 million in 2003 due
primarily to the sale of Intevac common stock to our employees
through our employee benefit plans. Financing activities used
cash of $7.4 million in 2002, primarily as a result of the
exchange of most of our convertible notes due 2004 for new
convertible notes due 2009 and cash. On July 12, 2002 we
completed the exchange of $36.3 million in aggregate
principal amount of our convertible notes due 2004 for
$29.5 million of our new
61/2% Convertible
Subordinated Notes due 2009 and $7.6 million in cash,
including $0.9 million for accrued interest. Sales of
Intevac common stock to our employees through our employee
benefit plans provided cash of $0.3 million in 2002.
At December 31, 2004, we had $17.5 million of cash and
cash equivalents and $24.6 million of short-term
investments. We intend to undertake approximately
$5.0 million in capital expenditures during the next
12 months, and we believe our existing cash, cash
equivalent and short-term investment balances will be sufficient
to meet our cash requirements for the next twelve months.
We have incurred operating losses each year since 1998 and
cannot predict with certainty when we will return to operating
profitability. We believe an upturn in demand for the type of
disk manufacturing equipment we produce is occurring, and we
expect our Equipment business to be profitable in 2005. We also
expect to continue to be in the investment mode in Imaging
during 2005, but with lower losses than in 2004.
32
Contractual Obligations
In the normal course of business, we enter into various
contractual obligations that will be settled in cash. These
obligations consist primarily of operating lease and purchase
obligations. The expected future cash flows required to meet
these obligations as of December 31, 2004 are shown in the
table below. More information on the operating lease obligations
is available in Part II, Item 8, “Financial
Statements and Supplementary Data.”
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due by Period | |
| |
|
| |
| |
|
Total | |
|
<1 Year | |
|
1-3 Years | |
|
3-5 Years | |
|
>5 Years | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Operating lease obligations
|
|
$ |
16,459 |
|
|
$ |
3,387 |
|
|
$ |
5,527 |
|
|
$ |
3,288 |
|
|
$ |
4,257 |
|
|
Purchase obligations
|
|
|
2,143 |
|
|
|
2,143 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
18,602 |
|
|
$ |
5,530 |
|
|
$ |
5,527 |
|
|
$ |
3,288 |
|
|
$ |
4,257 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk |
Interest rate risk. Our exposure to market risk for
changes in interest rates relates primarily to our investment
portfolio. We do not use derivative financial instruments in our
investment portfolio. We place our investments with high quality
credit issuers and, by policy, limit the amount of credit
exposure to any one issuer. Short-term investments typically
consist of investments in AAA rated commercial paper and debt
instruments issued by the US government and its agencies.
The table below presents principal amounts and related
weighted-average interest rates by year of maturity for our
investment portfolio at December 31, 2004.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 | |
|
2006 | |
|
2007 | |
|
Beyond | |
|
Total | |
|
Fair Value | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fixed rate amounts
|
|
$ |
9,980 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
9,980 |
|
|
$ |
9,976 |
|
| |
|
Weighted-average rate
|
|
|
2.16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Variable rate amounts
|
|
$ |
5,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,941 |
|
|
$ |
5,941 |
|
| |
|
Weighted-average rate
|
|
|
1.96 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fixed rate amounts
|
|
$ |
24,579 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
24,579 |
|
|
$ |
24,492 |
|
| |
|
Weighted-average rate
|
|
|
1.87 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Long-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fixed rate amounts
|
|
|
— |
|
|
$ |
8,052 |
|
|
|
— |
|
|
|
— |
|
|
$ |
8,052 |
|
|
$ |
7,959 |
|
| |
|
Weighted average rate
|
|
|
— |
|
|
|
2.13 |
% |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Total investment portfolio
|
|
$ |
40,500 |
|
|
$ |
8,052 |
|
|
|
— |
|
|
|
— |
|
|
$ |
48,552 |
|
|
$ |
48,368 |
|
Foreign exchange risk. From time to time, we enter into
foreign currency forward exchange contracts to economically
hedge certain of our anticipated foreign currency transaction,
translation and re-measurement exposures. The objective of these
contracts is to minimize the impact of foreign currency exchange
rate movements on our operating results. At December 31,
2004, we had no foreign currency forward exchange contracts.
33
|
|
| Item 8. |
Financial Statements and Supplementary Data |
INTEVAC, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Contents
| |
|
|
|
|
| |
|
Page | |
| |
|
| |
|
Report of Independent Registered Public Accounting Firm
|
|
|
35 |
|
|
Consolidated Balance Sheets
|
|
|
36 |
|
|
Consolidated Statements of Operations and Comprehensive Income
(Loss)
|
|
|
37 |
|
|
Consolidated Statement of Shareholders’ Equity
|
|
|
38 |
|
|
Consolidated Statements of Cash Flows
|
|
|
39 |
|
|
Notes to Consolidated Financial Statements
|
|
|
40 |
|
34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Intevac, Inc.
We have audited the consolidated balance sheets of Intevac, Inc.
as of December 31, 2004 and 2003, and the related
consolidated statements of operations and comprehensive income
(loss), shareholders’ equity and cash flows for each of the
three years in the period ended December 31, 2004. These
financial statements are the responsibility of management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatements. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Intevac, Inc. at December 31, 2004
and 2003, and the consolidated results of its operations and its
consolidated cash flows for each of the three years in the
period ended December 31, 2004, in conformity with
accounting principles generally accepted in the United States of
America.
Also, in our opinion, the data in the related financial
statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Intevac, Inc.’s internal control over
financial reporting as of December 31, 2004, based on
criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated March 22, 2005
expressed an unqualified opinion on management’s
assessment, and an adverse opinion on the effective operation,
of internal control over financial reporting.
San Jose, California
March 22, 2005
35
INTEVAC, INC.
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
ASSETS |
|
Current assets:
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
17,455 |
|
|
$ |
19,507 |
|
| |
Short-term investments
|
|
|
24,579 |
|
|
|
— |
|
| |
Trade and other accounts receivable, net of allowances of $217
and $22 at December 31, 2004 and 2003
|
|
|
4,775 |
|
|
|
14,016 |
|
| |
Inventories, including $6,255 and $5,431 held at customer
locations at December 31, 2004 and 2003
|
|
|
15,375 |
|
|
|
13,108 |
|
| |
Prepaid expenses and other current assets
|
|
|
956 |
|
|
|
1,113 |
|
| |
|
|
|
|
|
|
|
Total current assets
|
|
|
63,140 |
|
|
|
47,744 |
|
|
Property, plant and equipment, at cost:
|
|
|
|
|
|
|
|
|
| |
Leasehold improvements
|
|
|
6,654 |
|
|
|
6,225 |
|
| |
Machinery and equipment
|
|
|
18,216 |
|
|
|
16,529 |
|
| |
|
|
|
|
|
|
| |
|
|
24,870 |
|
|
|
22,754 |
|
| |
Less accumulated depreciation and amortization
|
|
|
18,874 |
|
|
|
16,958 |
|
| |
|
|
|
|
|
|
| |
|
|
5,996 |
|
|
|
5,796 |
|
|
Long-term investments
|
|
|
8,052 |
|
|
|
— |
|
|
Investment in 601 California Avenue LLC
|
|
|
2,431 |
|
|
|
2,431 |
|
|
Other long term assets
|
|
|
3 |
|
|
|
4 |
|
| |
|
|
|
|
|
|
| |
|
Total assets
|
|
$ |
79,622 |
|
|
$ |
55,975 |
|
| |
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDER’S EQUITY |
|
Current liabilities:
|
|
|
|
|
|
|
|
|
| |
Convertible notes
|
|
$ |
— |
|
|
$ |
1,025 |
|
| |
Accounts payable
|
|
|
1,647 |
|
|
|
3,396 |
|
| |
Accrued payroll and related liabilities
|
|
|
1,617 |
|
|
|
1,610 |
|
| |
Other accrued liabilities
|
|
|
2,943 |
|
|
|
2,643 |
|
| |
Customer advances
|
|
|
3,833 |
|
|
|
16,432 |
|
| |
|
|
|
|
|
|
|
Total current liabilities
|
|
|
10,040 |
|
|
|
25,106 |
|
|
Other long-term liabilities
|
|
|
207 |
|
|
|
— |
|
|
Commitments
|
|
|
— |
|
|
|
— |
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
| |
Undesignated preferred stock, no par value, 10,000 shares
authorized, no shares issued and outstanding
|
|
|
— |
|
|
|
— |
|
| |
Common stock, no par value:
|
|
|
|
|
|
|
|
|
| |
|
Authorized shares — 50,000
|
|
|
|
|
|
|
|
|
| |
|
Issued and outstanding shares — 20,182 and 16,953 at
December 31, 2004 and 2003, respectively
|
|
|
94,802 |
|
|
|
51,982 |
|
| |
Accumulated other comprehensive income
|
|
|
253 |
|
|
|
223 |
|
| |
Accumulated deficit
|
|
|
(25,680 |
) |
|
|
(21,336 |
) |
| |
|
|
|
|
|
|
| |
|
|
Total shareholders’ equity
|
|
|
69,375 |
|
|
|
30,869 |
|
| |
|
|
|
|
|
|
| |
|
|
Total liabilities and shareholders’ equity
|
|
$ |
79,622 |
|
|
$ |
55,975 |
|
| |
|
|
|
|
|
|
See accompanying notes.
36
INTEVAC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except | |
| |
|
per share amounts) | |
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Systems and components
|
|
$ |
61,326 |
|
|
$ |
27,738 |
|
|
$ |
27,625 |
|
| |
Technology development
|
|
|
8,289 |
|
|
|
8,556 |
|
|
|
6,159 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total net revenues
|
|
|
69,615 |
|
|
|
36,294 |
|
|
|
33,784 |
|
|
Cost of net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Systems and components
|
|
|
45,528 |
|
|
|
19,689 |
|
|
|
20,009 |
|
| |
Technology development
|
|
|
6,856 |
|
|
|
6,032 |
|
|
|
5,150 |
|
| |
Inventory provisions
|
|
|
1,375 |
|
|
|
743 |
|
|
|
1,316 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total cost of net revenues
|
|
|
53,759 |
|
|
|
26,464 |
|
|
|
26,475 |
|
|
Gross profit
|
|
|
15,856 |
|
|
|
9,830 |
|
|
|
7,309 |
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Research and development
|
|
|
11,580 |
|
|
|
12,037 |
|
|
|
10,846 |
|
| |
Selling, general and administrative
|
|
|
9,525 |
|
|
|
8,448 |
|
|
|
7,752 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
21,105 |
|
|
|
20,485 |
|
|
|
18,598 |
|
| |
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(5,249 |
) |
|
|
(10,655 |
) |
|
|
(11,289 |
) |
|
Interest expense
|
|
|
(55 |
) |
|
|
(1,787 |
) |
|
|
(2,981 |
) |
|
Interest income
|
|
|
634 |
|
|
|
269 |
|
|
|
284 |
|
|
Other income and expense, net
|
|
|
436 |
|
|
|
(92 |
) |
|
|
16,168 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(4,234 |
) |
|
|
(12,265 |
) |
|
|
2,182 |
|
|
Provision for (benefit from) income taxes
|
|
|
110 |
|
|
|
38 |
|
|
|
(6,592 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(4,344 |
) |
|
$ |
(12,303 |
) |
|
$ |
8,774 |
|
| |
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Foreign currency translation adjustments
|
|
|
30 |
|
|
|
34 |
|
|
|
67 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
30 |
|
|
|
34 |
|
|
|
67 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
$ |
(4,314 |
) |
|
$ |
(12,269 |
) |
|
$ |
8,841 |
|
| |
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income (loss)
|
|
$ |
(0.22 |
) |
|
$ |
(0.95 |
) |
|
$ |
0.73 |
|
| |
Shares used in per share amounts
|
|
|
19,749 |
|
|
|
12,948 |
|
|
|
12,077 |
|
|
Diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income (loss)
|
|
$ |
(0.22 |
) |
|
$ |
(0.95 |
) |
|
$ |
0.66 |
|
| |
Shares used in per share amounts
|
|
|
19,749 |
|
|
|
12,948 |
|
|
|
15,262 |
|
See accompanying notes.
37
INTEVAC, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Accumulated | |
|
Retained | |
|
|
| |
|
Common Stock | |
|
Other | |
|
Earnings | |
|
Total | |
| |
|
| |
|
Comprehensive | |
|
(Accum. | |
|
Shareholders’ | |
| |
|
Shares | |
|
Amount | |
|
Income | |
|
Deficit) | |
|
Equity | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Balance at December 31, 2001
|
|
|
12,004 |
|
|
$ |
19,093 |
|
|
$ |
122 |
|
|
$ |
(17,807 |
) |
|
$ |
1,408 |
|
| |
Shares issued in connection with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Exercise of stock options
|
|
|
13 |
|
|
|
19 |
|
|
|
— |
|
|
|
— |
|
|
|
19 |
|
| |
|
Employee stock purchase plan
|
|
|
108 |
|
|
|
273 |
|
|
|
— |
|
|
|
— |
|
|
|
273 |
|
| |
Compensation expense in the form of stock options
|
|
|
— |
|
|
|
4 |
|
|
|
— |
|
|
|
— |
|
|
|
4 |
|
| |
Foreign currency translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
67 |
|
|
|
— |
|
|
|
67 |
|
| |
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8,774 |
|
|
|
8,774 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
12,125 |
|
|
$ |
19,389 |
|
|
$ |
189 |
|
|
$ |
(9,033 |
) |
|
$ |
10,545 |
|
| |
Shares issued in connection with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Exercise of stock options
|
|
|
530 |
|
|
|
2,988 |
|
|
|
— |
|
|
|
— |
|
|
|
2,988 |
|
| |
|
Employee stock purchase plan
|
|
|
78 |
|
|
|
200 |
|
|
|
— |
|
|
|
— |
|
|
|
200 |
|
| |
|
Conversion of convertible notes due 2009
|
|
|
4,220 |
|
|
|
29,375 |
|
|
|
— |
|
|
|
— |
|
|
|
29,375 |
|
| |
Compensation expense in the form of stock options
|
|
|
— |
|
|
|
30 |
|
|
|
— |
|
|
|
— |
|
|
|
30 |
|
| |
Foreign currency translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
34 |
|
|
|
— |
|
|
|
34 |
|
| |
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(12,303 |
) |
|
|
(12,303 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
16,953 |
|
|
$ |
51,982 |
|
|
$ |
223 |
|
|
$ |
(21,336 |
) |
|
$ |
30,869 |
|
| |
Shares issued in connection with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Exercise of stock options
|
|
|
178 |
|
|
|
856 |
|
|
|
— |
|
|
|
— |
|
|
|
856 |
|
| |
|
Employee stock purchase plan
|
|
|
82 |
|
|
|
403 |
|
|
|
— |
|
|
|
— |
|
|
|
403 |
|
| |
|
Secondary public offering
|
|
|
2,969 |
|
|
|
41,561 |
|
|
|
— |
|
|
|
— |
|
|
|
41,561 |
|
| |
Foreign currency translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
30 |
|
|
|
— |
|
|
|
30 |
|
| |
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,344 |
) |
|
|
(4,344 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
20,182 |
|
|
$ |
94,802 |
|
|
$ |
253 |
|
|
$ |
(25,680 |
) |
|
$ |
69,375 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
38
INTEVAC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(4,344 |
) |
|
$ |
(12,303 |
) |
|
$ |
8,774 |
|
|
Adjustments to reconcile net income (loss) to net cash and cash
equivalents provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Depreciation
|
|
|
2,031 |
|
|
|
1,963 |
|
|
|
2,577 |
|
| |
Amortization of debt offering costs
|
|
|
1 |
|
|
|
87 |
|
|
|
672 |
|
| |
Net amortization (accretion) of investment premiums and
discounts
|
|
|
233 |
|
|
|
— |
|
|
|
— |
|
| |
Inventory provisions
|
|
|
1,375 |
|
|
|
743 |
|
|
|
1,316 |
|
| |
Gain on sale of Rapid Thermal Processing product line
|
|
|
— |
|
|
|
(287 |
) |
|
|
(15,428 |
) |
| |
Gain on sale of equipment
|
|
|
— |
|
|
|
— |
|
|
|
(324 |
) |
| |
Gain on purchase of convertible notes
|
|
|
— |
|
|
|
— |
|
|
|
(23 |
) |
| |
Compensation expense in the form of common stock
|
|
|
— |
|
|
|
30 |
|
|
|
4 |
|
| |
Loss on disposal of equipment
|
|
|
86 |
|
|
|
841 |
|
|
|
13 |
|
| |
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Accounts receivable
|
|
|
9,261 |
|
|
|
(8,804 |
) |
|
|
2,264 |
|
| |
|
Inventory
|
|
|
(4,309 |
) |
|
|
2,028 |
|
|
|
3,359 |
|
| |
|
Prepaid expenses and other assets
|
|
|
161 |
|
|
|
(152 |
) |
|
|
(492 |
) |
| |
|
Accounts payable
|
|
|
(1,749 |
) |
|
|
1,657 |
|
|
|
(890 |
) |
| |
|
Accrued payroll and other accrued liabilities
|
|
|
449 |
|
|
|
(526 |
) |
|
|
118 |
|
| |
|
Customer advances
|
|
|
(12,599 |
) |
|
|
4,473 |
|
|
|
(1,120 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
(5,060 |
) |
|
|
2,053 |
|
|
|
(7,954 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net cash and cash equivalents provided by (used in) operating
activities
|
|
|
(9,404 |
) |
|
|
(10,250 |
) |
|
|
820 |
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of investments
|
|
|
(45,864 |
) |
|
|
— |
|
|
|
— |
|
|
Proceeds from sales and maturities of investments
|
|
|
13,000 |
|
|
|
— |
|
|
|
— |
|
|
Net proceeds from sale of Rapid Thermal Processing product line
|
|
|
— |
|
|
|
287 |
|
|
|
17,780 |
|
|
Proceeds from sale of equipment
|
|
|
10 |
|
|
|
7 |
|
|
|
535 |
|
|
Purchase of equipment
|
|
|
(1,620 |
) |
|
|
(2,199 |
) |
|
|
(1,480 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net cash and cash equivalents provided by (used in) investing
activities
|
|
|
(34,474 |
) |
|
|
(1,905 |
) |
|
|
16,835 |
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
42,820 |
|
|
|
3,188 |
|
|
|
292 |
|
|
Payoff of convertible notes due 2004
|
|
|
(1,025 |
) |
|
|
— |
|
|
|
— |
|
|
Repurchase of Intevac convertible notes
|
|
|
— |
|
|
|
— |
|
|
|
(225 |
) |
|
Exchange of Intevac convertible notes due 2004
|
|
|
— |
|
|
|
— |
|
|
|
(7,483 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net cash and cash equivalents provided by (used in) financing
activities
|
|
|
41,795 |
|
|
|
3,188 |
|
|
|
(7,416 |
) |
|
Effect of exchange rate changes on cash
|
|
|
31 |
|
|
|
17 |
|
|
|
61 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(2,052 |
) |
|
|
(8,950 |
) |
|
|
10,300 |
|
|
Cash and cash equivalents at beginning of period
|
|
|
19,507 |
|
|
|
28,457 |
|
|
|
18,157 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
17,455 |
|
|
$ |
19,507 |
|
|
$ |
28,457 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash paid (received) for:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest
|
|
$ |
33 |
|
|
$ |
1,987 |
|
|
$ |
2,456 |
|
| |
Income taxes
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
| |
Income tax refund
|
|
|
— |
|
|
|
(214 |
) |
|
|
(6,369 |
) |
|
Other non-cash changes:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Inventories transferred to (from) property, plant and
equipment
|
|
$ |
706 |
|
|
$ |
— |
|
|
$ |
(514 |
) |
| |
Exchange of $36.3M of convertible notes due 2004 for $29.5M of
convertible notes 2009 (exchange completed July 2002)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Conversion of convertible notes due 2009 into common stock
|
|
|
— |
|
|
|
29,375 |
|
|
|
— |
|
See accompanying notes.
39
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
| 1. |
Business and Nature of Operations |
We are the world’s leading provider of disk sputtering
equipment to manufacturers of magnetic media used in hard disk
drives and a developer and provider of leading technology for
extreme low light imaging sensors, cameras and systems. We
operate two businesses: Equipment and Imaging.
Our Equipment business designs, manufactures, markets and
services complex capital equipment used in the sputtering, or
deposition, of highly engineered thin-films of material onto
magnetic disks which are used in hard disk drives. Hard disk
drives are the primary storage medium for digital data and
function by storing data on magnetic disks. These disks are
created in a sophisticated manufacturing process involving a
variety of many steps, including plating, annealing, polishing,
texturing, sputtering and lubrication.
Our Imaging business develops and manufactures electro-optical
sensors, cameras, and systems that permit highly sensitive
detection of photons in the visible and near infrared portions
of the spectrum, allowing vision in extreme low light situations.
|
|
| 2. |
Summary of Significant Accounting Policies |
The consolidated financial statements include the accounts of
Intevac and its wholly owned subsidiaries. All inter-company
transactions and balances have been eliminated.
We recognize revenue using guidance from SEC Staff Accounting
Bulletin No. 104, “Revenue Recognition.” Our
policy allows revenue recognition when persuasive evidence of an
arrangement exists, delivery has occurred or services have been
rendered, the price is fixed or determinable, and collectibility
is reasonably assured. On January 1, 2003, we changed our
revenue recognition policy for system orders received after
December 31, 2002.
System Revenue Recognition for Orders Received After
December 31, 2002. Certain of our system sales with
customer acceptance provisions are accounted for as
multiple-element arrangements. If we have previously met defined
customer acceptance levels with the specific type of system,
then we recognize revenue for the fair market value of the
system upon shipment and transfer of title, and recognize
revenue for the fair market value of installation and acceptance
services when those services are completed. For systems that
have generally not been demonstrated to meet product
specifications prior to shipment, revenue recognition is usually
deferred until customer acceptance. In the event that our
customer chooses not to complete installation and acceptance,
and our obligations under the contract to complete installation,
acceptance or any other tasks, with the exception of warranty
obligations, have been fully discharged, then we recognize any
remaining revenue to the extent that collectibility under the
contract is reasonably assured.
The revenue recognition policy outlined above and implemented
for system orders received after December 31, 2002 was
adopted to better conform our revenue recognition policies to
industry accounting practice for companies selling similar
equipment. The effect of adopting this policy in years prior to
2003 would have been no change in 2002 revenues. The effect on
net income (loss) of adopting this policy in years prior to 2003
would have been no effect on 2002 net income. The adoption
of this policy had no effect on revenues or net loss in 2003.
System Revenue Recognition for Orders Received Before
December 31, 2002. Revenues for systems that were
ordered prior to December 31, 2002 are recognized upon
customer acceptance. For memory and flat panel systems shipped
through a distributor, revenue is typically recognized after the
distributor has accepted the system at our factory and the
system has been shipped. For memory and flat panel systems sold
directly to end customers, revenue is recognized after
installation and acceptance of the system at the customer site.
40
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
When we believe that there may be higher than normal end user
installation and acceptance issues for systems shipped through a
distributor, such as when the first unit of a newly designed
system is delivered, we defer revenue recognition until the
distributor’s customer has also accepted the system.
Accounting Treatment for Systems. For periods both before
and after December 31, 2002, during the period that a
system is undergoing customer acceptance (either distributor or
end user), the value of the system remains in inventory, and any
payments received, or amounts invoiced, related to the system
are included in customer advances. When revenue is recognized on
the system, the inventory is charged to cost of net revenues,
the customer advance is liquidated, and the customer is billed
for the unpaid balance of the system revenue.
In some instances, hardware that is not essential to the
functioning of the system may be delivered after acceptance of
the system. In these cases, we estimate the fair market value of
the non-essential hardware as if it had been sold on a
stand-alone basis, and defer recognizing revenue on that value
until the hardware is delivered.
Occasionally, we are asked by our customers to delay delivery of
products that they have accepted, and to temporarily hold the
product at our facility. To determine revenue recognition when
the product is not immediately shipped to the customer, we apply
the criteria outlined in the SEC Enforcement Release
No. 108, which is consistent with APB Statement 4,
paragraph 150. All of the criteria must be met in order for
revenue to be recognized.
Other Systems and Non-System Revenue Recognition.
Revenues for systems without installation and acceptance
provisions, as well as revenues from technology upgrades, spare
parts, consumables and prototype products built by the Imaging
business are recognized when title passes to our customer.
Service and maintenance contract revenue, which to date has been
insignificant, is recognized ratably over applicable contract
periods or as the service is performed.
Obligations After Shipment. Our shipping terms are
generally FOB shipping point, but in some cases are FOB
destination. For systems sold directly to the end user, our
obligations remaining after shipment typically include
installation, end user factory acceptance and warranty. For
systems sold to distributors, typically the distributor assumes
responsibility for installation and end user customer
acceptance. In some cases, the distributor will assume some or
all of the warranty liability. For products other than systems
and system upgrades, warranty is the only obligation we have
after shipment.
Technology Development Revenue Recognition. We perform
research and development work under various government-sponsored
research contracts. Generally these contracts are best efforts
cost-plus-fixed-fee (“CPFF”) contracts or firm
fixed-price (“FFP”) contracts. On best efforts CPFF
contracts we typically commit to perform certain research and
development efforts up to an agreed upon amount. In connection
with these contracts, we receive funding on an incremental basis
up to a ceiling. On FFP contracts we typically commit to perform
certain development and production efforts for a fixed price.
Our CPFF contracts are accounted for under ARB No. 43,
Chapter 11, Section A, which addresses
Cost-Plus-Fixed-Fee Contracts. The contracts are all cost-type,
with financial terms that are a mixture of fixed fee, no fee and
cost sharing. Revenue on these contracts is recognized in
accordance with contract terms, typically as costs are incurred.
In the event that total cost incurred under a particular
contract over-runs its agreed upon amount, we may be liable for
the additional costs.
Our FFP contracts are accounted for under SOP 81-1
“Accounting for Performance of Construction-Type and
Certain Production-Type Contracts.” Revenue on FFP
contracts is generally recognized on the
percentage-of-completion method based on costs incurred in
relation to the total estimated costs. Provisions for estimated
losses on FFP research contracts are recorded in the period in
which such losses are determined.
41
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The deliverables under each CPFF or FFP contract range from
providing reports to providing hardware. In the majority of the
contracts there is no obligation for either party to continue
the program once the funds have been expended. The efforts can
be terminated at any time for convenience, in which case we
would be reimbursed for our actual incurred costs, plus fee, if
applicable, for the completed effort. We own the entire right,
title and interest to each invention discovered under the
contract, unless we specifically give up that right. The
U.S. Government has a paid-up license to use any
invention/intellectual property developed under government
funded contracts for government purposes only. In addition, we
have, from time to time, negotiated with third parties to fund a
portion of our costs in return for granting them a joint
interest in the technology rights developed pursuant to the
contract.
|
|
|
Trade Receivables and Doubtful Accounts |
We evaluate the collectibility of trade receivables on an
ongoing basis and provide reserves against potential losses when
appropriate. Management analyzes historical bad debts, customer
concentrations, customer credit worthiness, changes in customer
payment tendencies and current economic trends when evaluating
the adequacy of the allowance for doubtful accounts. Customer
accounts are written off against the allowance when the amount
is deemed uncollectible.
Included in trade receivables are unbilled receivables related
to government contracts of $975,000 and $1,065,000 at
December 31, 2004 and December 31, 2003, respectively.
Our typical warranty is 12 months from customer acceptance.
We also sell extended warranties beyond 12 months to some
customers. The warranty period on used systems is generally
shorter than 12 months. During this warranty period any
defective non-consumable parts are replaced and installed at no
charge to the customer. The warranty period on consumable parts
is limited to their reasonable usable life. A provision for the
estimated warranty cost is recorded at the time revenue is
recognized.
On the consolidated balance sheet, the short-term portion of the
of the warranty provision is included in Other Accrued
Liabilities, while the long-term portion is included in Other
Long-Term Liabilities.
The following table displays the activity in the warranty
provision account for 2004 and 2003:
| |
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Beginning balance
|
|
$ |
534 |
|
|
$ |
845 |
|
|
Expenditures incurred under warranties
|
|
|
(1,024 |
) |
|
|
(909 |
) |
|
Accruals for product warranties issued during the reporting
period
|
|
|
1,994 |
|
|
|
474 |
|
|
Adjustments to previously existing warranty accruals
|
|
|
(388 |
) |
|
|
124 |
|
| |
|
|
|
|
|
|
|
Ending balance
|
|
$ |
1,116 |
|
|
$ |
534 |
|
| |
|
|
|
|
|
|
The following table displays the balance sheet classification of
the warranty provision account at December 31, 2004 and
2003:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Other accrued liabilities
|
|
$ |
909 |
|
|
$ |
534 |
|
|
Other long-term liabilities
|
|
|
207 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
Total warranty provision
|
|
$ |
1,116 |
|
|
$ |
534 |
|
| |
|
|
|
|
|
|
42
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
We have entered into agreements with customers and suppliers
that include limited intellectual property indemnification
obligations that are customary in the industry. These guarantees
generally require us to compensate the other party for certain
damages and costs incurred as a result of third party
intellectual property claims arising from these transactions.
The nature of the intellectual property indemnification
obligations prevents us from making a reasonable estimate of the
maximum potential amount we could be required to pay our
customers and suppliers. Historically, we have not made any
significant indemnification payments under such agreements and
no amount has been accrued in the accompanying consolidated
financial statements with respect to these indemnification
obligations.
|
|
|
International Distribution Costs |
We make payments to agents and representatives under agreements
related to international sales in return for obtaining orders
and providing installation and warranty services. These payments
to agents and representatives are included in selling, general
and administrative expenses. These amounts totaled approximately
$0, $119,000 and $300,000 for the years ended December 31,
2004, 2003 and 2002, respectively.
Customer advances generally represent nonrefundable deposits
invoiced by the Company in connection with receiving customer
purchase orders and other events preceding acceptance of
systems. Customer advances related to products that have not
been shipped to customers and included in accounts receivable
were $16,000 and $4.7 million at December 31, 2004 and
2003, respectively.
|
|
|
Cash, Cash Equivalents and Short-term Investments |
Our investment portfolio consists of cash, cash equivalents and
investments in debt securities. We consider all highly liquid
investments with a maturity of three months or less when
purchased to be cash equivalents. Investments in debt securities
consist principally of highly rated debt instruments with
maturities generally between one and 25 months.
In accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 115 “Accounting for Certain
Investments in Debt and Equity Securities,” and based on
our intentions regarding these instruments, we have classified
our investments in debt securities as held-to-maturity and
account for these investments at amortized cost. Interest income
is recorded using an effective interest rate, with the
associated premium or discount amortized to interest income. The
table below presents the amortized principal amount, major
security type and maturities for our investments in debt
securities.
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
|
December 31, |
| |
|
2004 | |
|
2003 |
| |
|
| |
|
|
| |
|
(In thousands) |
|
Amortized Principal Amount:
|
|
|
|
|
|
|
|
|
| |
Debt securities issued by US government agencies
|
|
$ |
28,017 |
|
|
$ |
— |
|
| |
Corporate debt securities
|
|
|
4,614 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
Total investments in debt securities
|
|
$ |
32,631 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
| |
Short-term investments
|
|
$ |
24,579 |
|
|
$ |
— |
|
| |
Long-term investments
|
|
|
8,052 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
Total investments in debt securities
|
|
$ |
32,631 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
Approximate fair value of investments in debt securities
|
|
$ |
32,450 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
43
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Cash and cash equivalents represent cash accounts and money
market funds. Included in accounts payable is $188,000 and
$635,000 of book overdraft at December 31, 2004 and
December 31, 2003, respectively.
|
|
|
Valuation of Long-lived and Intangible Assets |
We assess the impairment of identifiable intangibles and
long-lived assets whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors
we consider important which could trigger an impairment review
include the following:
|
|
|
| |
• |
significant underperformance relative to expected historical or
projected future operating results; |
| |
| |
• |
significant changes in the manner of our use of the acquired
assets or the strategy for our overall business; and |
| |
| |
• |
significant negative industry or economic trends. |
When we determine that the carrying value of long-lived assets,
intangibles or goodwill may not be recoverable based upon the
existence of one or more of the above indicators of impairment,
we measure any impairment based on a projected discounted cash
flow method using a discount rate determined by our management
to be commensurate with the risk inherent in our current
business model.
Prototype product costs that are not paid for under research and
development contracts and are in excess of fair market value are
charged to research and development expense.
|
|
|
Foreign Exchange Contracts |
We may enter into foreign currency forward exchange contracts to
hedge certain of our foreign currency transaction, translation
and re-measurement exposures. Our accounting policies for some
of these instruments are based on our designation of such
instruments as hedging transactions. Instruments not designated
as a hedge transaction will be “marked to market” at
the end of each accounting period. The criteria we use for
designating an instrument as a hedge include effectiveness in
exposure reduction and one-to-one matching of the derivative
financial instrument to the underlying transaction being hedged.
Gains and losses on foreign currency forward exchange contracts
that are designated and effective as hedges of existing
transactions are recognized in income in the same period as
losses and gains on the underlying transactions are recognized
and generally offset.
As of December 31, 2004 and 2003, Intevac had no foreign
currency forward exchange contracts outstanding.
The carrying amount of the short-term financial instruments
(cash and cash equivalents, short-term investments, accounts
receivable and certain other liabilities) approximates fair
value due to the short-term maturity of those instruments.
44
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Inventories are priced using standard costs, which approximates
cost under the first-in, first-out method, and are stated at the
lower of cost or market. Inventories consist of the following:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Raw materials
|
|
$ |
5,624 |
|
|
$ |
3,306 |
|
|
Work-in-progress
|
|
|
3,496 |
|
|
|
4,371 |
|
|
Finished goods
|
|
|
6,255 |
|
|
|
5,431 |
|
| |
|
|
|
|
|
|
| |
|
$ |
15,375 |
|
|
$ |
13,108 |
|
| |
|
|
|
|
|
|
Finished goods inventory consists primarily of completed systems
at customer sites that are undergoing installation and
acceptance testing.
Inventory reserves included in the above numbers were $9.9 and
$10.2 million at December 31, 2004 and
December 31, 2003, respectively. Each quarter, we analyze
our inventory (raw materials, work-in-progress and finished
goods) against the forecast demand for the next 12 months.
Raw materials with no forecast requirements in that period are
considered excess and inventory provisions are established to
write those items down to zero net book value. Work-in-progress
and finished goods inventories with no forecast requirements in
that period are typically written down to the lower of cost or
market. During this process, some inventory is identified as
having no future use or value to us and is disposed of against
the reserves.
During the year ended December 31, 2004, $1.4 million
was added to inventory reserves based on the quarterly analyses
and $1.6 million of inventory was disposed of and charged
to the reserve. A system in inventory with a value of $706,000,
net of a $250,000 reserve, was transferred to fixed assets and
capitalized.
During the year ended December 31, 2003, $743,000 was added
to inventory reserves based on the quarterly analyses and
$698,000 of inventory was disposed of and charged to the
reserve. Inventory reserves increased by an additional $588,000
due primarily to reserves charged against research and
development for prototype systems built in inventory.
|
|
|
Property, Plant and Equipment |
Equipment and leasehold improvements are carried at cost less
accumulated depreciation and amortization. Gains and losses on
dispositions are reflected in the Consolidated Statements of
Operations and Comprehensive Income (Loss).
Depreciation for machinery and equipment is computed using the
straight-line method over the estimated useful lives of the
assets. Amortization of leasehold improvements is computed using
the shorter of the remaining terms of the lease or the estimated
economic useful lives of the improvements.
When amortizable intangibles exist, we amortize them on a
straight-line basis over their estimated useful lives, which
range from two to seven years. At December 31, 2004, 2003
and 2002 there were no intangible assets reported on our
consolidated balance sheet, or amortized to expense during the
years then ended.
SFAS No. 130, “Reporting Comprehensive
Income” requires unrealized gains or losses on foreign
currency translation adjustments, which prior to the adoption
were reported separately in shareholders’ equity,
45
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
to be included in other comprehensive income. As of
December 31, 2004, the $253,000 balance of accumulated
other comprehensive income is comprised entirely of accumulated
foreign currency translation adjustments.
At December 31, 2004, we had two stock-based employee
compensation plans, which are described more fully in
Note 10. We account for those plans under the recognition
and measurement principles of APB Opinion No. 25,
“Accounting for Stock Issued to Employees”, and
related Interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under
those plans had an exercise price equal to the market value of
the underlying common stock on the date of grant. We plan to
adopt the fair value requirements of SFAS No. 123R
beginning in the three-month period ended October 1, 2005.
Pro forma information regarding net income (loss) and earnings
(loss) per share is required by SFAS No. 123, which
also requires that the information be determined as if we had
accounted for our employee stock options granted subsequent to
December 31, 1994 under the fair value method of this
Statement. The fair value for these options was estimated at the
date of grant using a Black-Scholes multiple option pricing
model with the following weighted average assumptions for 2004,
2003 and 2002, respectively: risk-free interest rates of 3.60%,
1.62% and 1.64%; dividend yields of 0.0%, 0.0% and 0.0%;
volatility factors of the expected market price of
Intevac’s common stock of 0.946, 0.943 and 0.933; and a
weighted-average expected life of the option of 5.60, 2.22 and
2.68 years.
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition,
option models require the input of highly subjective assumptions
including the expected stock price volatility. Because our
employee stock options have characteristics significantly
different from those of traded options, and because changes in
the subjective assumptions can materially affect the fair value
estimate, in management’s opinion, the existing models do
not necessarily provide a reliable single measure of the fair
value of its employee stock options.
Under the 2003 Employee Stock Purchase Plan (the
“ESPP”), we are authorized to issue up to
358,197 shares of common stock to participating employees.
Under the terms of the ESPP, employees can choose to have up to
10% of their annual base earnings withheld to
purchase Intevac’s common stock. The purchase price of
the stock is 85% of the lower of the subscription date fair
market value or the purchase date fair market value. Under the
ESPP, we sold 82,184, 77,749 and 108,020 shares to
employees in 2004, 2003 and 2002, respectively. As of
December 31, 2004, 276,013 shares remained reserved
for issuance under the ESPP. We do not recognize compensation
cost related to employee purchase rights under the plan. To
comply with the pro forma reporting requirements of
SFAS No. 123, compensation cost is estimated for the
fair value of the employees’ purchase rights using the
Black-Scholes model with the following assumptions for those
rights granted in 2004, 2003 and 2002, respectively: risk-free
interest rates of 2.37%, 1.43% and 1.12% dividend yield of 0.0%,
0.0% and 0.0%; expected volatility of 0.952, 0.940 and 0.933;
and an expected life of 1.92, 2.00 and 1.50 (the offering period
ends July 31, 2006 for the subscription period that began
in August 2004). The weighted average fair value of those
purchase rights granted in 2004, 2003 and 2002 were $2.95, $5.24
and $2.47, respectively per share.
46
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table illustrates the effect on net income (loss)
and earnings (loss) per share if we had applied the fair
value-recognition provisions of SFAS No. 123,
“Accounting for Stock-Based Compensation”, to
stock-based employee compensation.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except | |
| |
|
per share data) | |
|
Net income (loss), as reported
|
|
$ |
(4,344 |
) |
|
$ |
(12,303 |
) |
|
$ |
8,774 |
|
|
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects
|
|
|
(1,378 |
) |
|
|
(683 |
) |
|
|
(157 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss)
|
|
$ |
(5,722 |
) |
|
$ |
(12,986 |
) |
|
$ |
8,617 |
|
| |
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic — as reported
|
|
$ |
(0.22 |
) |
|
$ |
(0.95 |
) |
|
$ |
0.73 |
|
| |
Basic — pro forma
|
|
$ |
(0.29 |
) |
|
$ |
(1.00 |
) |
|
$ |
0.71 |
|
| |
Diluted — as reported
|
|
$ |
(0.22 |
) |
|
$ |
(0.95 |
) |
|
$ |
0.66 |
|
| |
Diluted — pro forma
|
|
$ |
(0.29 |
) |
|
$ |
(1.00 |
) |
|
$ |
0.65 |
|
Certain prior year amounts in the Consolidated Financial
Statements have been reclassified to conform to 2004
presentation.
|
|
|
Net income (loss) per share |
The following table sets forth the computation of basic and
diluted loss per share:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Numerator for basic income (loss) per share — income
(loss) available to common stockholders
|
|
$ |
(4,344 |
) |
|
$ |
(12,303 |
) |
|
$ |
8,774 |
|
| |
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
61/2% convertible
notes(1)
|
|
|
— |
|
|
|
— |
|
|
|
1,338 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Numerator for diluted earnings (loss) per share —
income (loss) available to common stockholders after assumed
conversions
|
|
$ |
(4,344 |
) |
|
$ |
(12,303 |
) |
|
$ |
10,112 |
|
| |
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Denominator for basic earnings (loss) per share —
weighted-average shares
|
|
|
19,749 |
|
|
|
12,948 |
|
|
|
12,077 |
|
| |
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Employee stock options(2)
|
|
|
— |
|
|
|
— |
|
|
|
137 |
|
| |
|
61/2% convertible
notes(1)
|
|
|
— |
|
|
|
— |
|
|
|
3,048 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Dilutive potential common shares
|
|
|
— |
|
|
|
— |
|
|
|
3,185 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Denominator for diluted earnings (loss) per share —
adjusted weighted-average shares and assumed conversions
|
|
|
19,749 |
|
|
|
12,948 |
|
|
|
15,262 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Diluted EPS for the twelve-month periods ended December 31,
2004 and 2003 excludes “as converted” treatment of the
convertible notes, as their inclusion would be anti-dilutive.
The number of “as converted” shares excluded from the
twelve-month periods ended December 31, 2004 and 2003 was |
47
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
8,568 and 3,619,134, respectively. $29.4 million of the
notes were converted in the fourth quarter of 2003 and the
$1.0 million balance of the notes was repaid in March 2004. |
| |
| (2) |
Potentially dilutive securities, consisting of shares issuable
upon exercise of employee stock options, are excluded from the
calculation of diluted EPS as their effect would be
anti-dilutive. The weighted average number of employee stock
options excluded from the twelve-month periods ended
December 31, 2004, 2003 and 2002 was 1,605,593, 1,731,305
and 1,328,278, respectively. |
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results inevitably
will differ from those estimates, and such differences may be
material to the financial statements.
|
|
|
New Accounting Pronouncements |
In November 2002, the Emerging Issues Task Force
(“EITF”) issued EITF 00-21 “Revenue
Arrangements with Multiple Deliverables.” EITF 00-21
prescribes a method to account for contracts that have multiple
elements or deliverables. It provides guidance on how to
allocate the value of a contract to its different deliverables,
as well as guidance on when to recognize revenue allocated to
each deliverable over its performance period. The provisions of
EITF 00-21 apply to revenue arrangements entered into in
the fiscal periods beginning after June 15, 2003. The
adoption of EITF No. 00-21 did not have a material impact
on our financial statements.
In May 2003, the FASB issued SFAS No. 150,
“Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.”
SFAS No. 150 requires certain financial instruments
that have both equity and liability characteristics to be
classified as a liability on the balance sheet.
SFAS No. 150 is effective for the first interim period
beginning after June 15, 2003. The adoption of this
statement did not have a material impact on our financial
statements.
In March 2004, the Emerging Issues Task Force (“EITF”)
issued EITF No. 03-01, “The Meaning of
Other-Than-Temporary Impairment and its Application to Certain
Investments,” which provides new guidance for assessing
impairment losses on debt and equity investments. The new
impairment model applies to investments accounted for under the
cost or equity method and investments accounted for under
FAS 115, “Accounting for Certain Investments in Debt
and Equity Securities.” EITF No. 03-01 also includes
new disclosure requirements for cost method investments and for
all investments that are in an unrealized loss position. In
September 2004, the FASB delayed the accounting provisions of
EITF No. 03-01; however the disclosure requirements remain
effective and the applicable disclosures have been included in
our consolidated financial statements and related notes thereto.
We do not expect the adoption of this EITF to have an effect on
our financial statements.
In June 2004, the EITF issued EITF No. 03-16,
“Accounting for Investments in Limited Liability
Companies,” which provides new guidance on determining
whether non-controlling investments in a Limited Liability
Company (“LLC”) should be accounted for under the cost
method or the equity method. EITF No. 03-16 states that an
investment in an LLC that maintains a “specific ownership
account” for each investor should be viewed as similar to
an investment in a limited partnership for determining whether a
non-controlling investment in an LLC should be accounted for
using the cost or equity method. EITF No. 03-16 is
effective for the first interim reporting period beginning after
June 15, 2004. The adoption of EITF No. 03-16 did not
have an effect on our financial statements.
48
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In November 2004, the FASB issued SFAS No. 151,
“Inventory Costs — an amendment of ARB
No. 43”, which is the result of its efforts to
converge U.S. accounting standards for inventories with
International Accounting Standards. SFAS No. 151
requires idle facility expenses, freight, handling costs, and
wasted material (spoilage) costs to be recognized as
current-period charges. It also requires that allocation of
fixed production overheads to the costs of conversion be based
on the normal capacity of the production facilities.
SFAS No. 151 will be effective for inventory costs
incurred during fiscal years beginning after June 15, 2005.
We do not expect the adoption of this statement to have a
material impact on our financial statements.
In December 2004, FASB issued SFAS No. 123 (Revised
2004), “Share-Based Payment”. SFAS No. 123R
addresses all forms of share-based payment (“SBP”)
awards, including shares issued under certain employee stock
purchase plans, stock options, restricted stock and stock
appreciation rights. SFAS No. 123R will require us to
expense SBP awards with compensation cost for SBP transactions
measured at fair value. SFAS No. 123R requires us to
adopt the new accounting provisions beginning in our third
quarter of 2005. Although we are in the process of evaluating
the impact of applying the various provisions of
SFAS No. 123R, we expect that this statement will have
a material impact on our financial statements.
In December 2004, the FASB issued SFAS No. 153,
“Exchanges of Non-monetary Assets, an amendment of APB
No. 29” which requires non-monetary exchanges to be
recorded at the fair value of the assets exchanged, with certain
exceptions. This standard requires most exchanges of productive
assets to be accounted for at fair value, rather than at
carryover basis. The provisions of SFAS No. 153 are
effective for fiscal years beginning after June 15, 2005.
We do not expect the adoption of this statement to have a
material impact on our financial statements.
|
|
|
Credit Risk and Significant Customers |
Financial instruments that potentially subject us to significant
concentrations of credit risk consist of cash equivalents,
short- and long-term investments, accounts receivable and
foreign exchange forward contracts. We generally invest our
excess cash in money market funds, commercial paper and in debt
securities of the US government and its agencies, which each
have contracted maturities of 25 months or less and an
average maturity in aggregate of one year or less. By policy,
our investments in commercial paper, certificates of deposit,
Eurodollar time deposits, or banker’s acceptances are rated
AAA or better. Our accounts receivable tend to be concentrated
in a limited number of customers. At December 31, 2004, two
customers accounted for 30% and 16%, respectively of our
accounts receivables and in aggregate accounted for 46% of net
accounts receivable. At December 31, 2003, two customers
accounted for 18% and 44%, respectively of our accounts
receivables and in aggregate accounted for 62% of net accounts
receivable.
Our largest customers tend to change from period to period.
Historically, a significant portion of our revenues in any
particular period have been attributable to sales to a limited
number of customers. In 2004, two customers accounted for 62%
and 11%, respectively of our consolidated net revenues and in
aggregate accounted for 73% of net revenues. In 2003, four
customers accounted for 25%, 18%, 13% and 10%, respectively, of
our consolidated revenues and in aggregate accounted for 66% of
net revenues. In 2002, three customers accounted for 42%, 21%,
and 11%, respectively, of our consolidated revenues and in
aggregate accounted for 74% of net revenues. Intevac performs
credit evaluations of its customers’ financial condition
and generally requires deposits on system orders but does not
generally require collateral or other security to support
customer receivables.
49
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Disk manufacturing products contributed a significant portion of
our revenues in 2004, 2003 and 2002. We expect that our ability
to maintain or expand our current levels of revenues and to
return to operating profitability in the future will depend upon
our success in enhancing our existing systems and developing and
manufacturing competitive disk manufacturing equipment, such as
our 200 Lean, and our success in developing both military and
commercial products based on our low light and LIVAR technology.
|
|
| 4. |
Sale of Rapid Thermal Processing Product Line |
In the fourth quarter of 2002, we sold our Rapid Thermal
Processing product line to Photon Dynamics, Inc.
(“PDI”) for $20 million in cash and the
assumption of certain liabilities. $2 million of the cash
payment was held in escrow and was not included in total assets
on the consolidated balance sheet as of December 31, 2002,
due to the contingencies related to the release of these funds
from escrow. In connection with this sale, we recorded a gain in
2002 of $15.4 million, which is included in other income
and expense, net on the Consolidated Statement of Operations and
Comprehensive Income (Loss). The following table recaps the gain
from the sale and the effect on Intevac’s balance sheet for
the year ended December 31, 2002 (in thousands):
| |
|
|
|
|
|
|
|
Cash received from PDI (excluding the $2 million in escrow)
|
|
$ |
18,000 |
|
|
Less: Accounts receivable transferred to PDI
|
|
|
(594 |
) |
| |
|
Inventory transferred to PDI
|
|
|
(1,911 |
) |
| |
|
Warranty and retrofit liability transferred to PDI
|
|
|
163 |
|
| |
|
Other assets and liabilities transferred to PDI
|
|
|
(10 |
) |
| |
|
Expenses associated with the transaction
|
|
|
(220 |
) |
| |
|
|
|
| |
Net gain on sale
|
|
$ |
15,428 |
|
| |
|
|
|
In the fourth quarter of 2003, we received $287,000, net of
expenses, from the escrow. This amount is included in other
income and expense, net on the Consolidated Statement of
Operations and Comprehensive Income (Loss). The remainder of the
funds in escrow were returned to PDI.
|
|
|
601 California Avenue LLC |
In 1995, we entered into a Limited Liability Company Operating
Agreement (the “Operating Agreement”), which expires
December 31, 2015, with 601 California Avenue LLC (the
“LLC”), a California limited liability company formed
and owned by Intevac and certain shareholders of Intevac at that
time. Under the Operating Agreement we transferred our leasehold
interest in the site of our discontinued night vision business
(the “Site”) in exchange for a preferred share in the
LLC with a face value of $3,900,000. We are accounting for the
investment under the cost method and have recorded our
investment in the LLC at $2,431,000, which represents our
historical carrying value of the leasehold interest in the Site.
The preferred share in the LLC pays a 10% annual cumulative
preferred dividend.
During 1996, the LLC formed a joint venture with Stanford
University (the “Stanford JV”). The Stanford JV
developed the property and has leased the property through
August 2009. The LLC is a profitable enterprise whose primary
asset is its interest in the Stanford JV. The Company received
dividends of $390,000 from the LLC in each of the last three
years. These dividends are included in other income and expense.
50
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
We lease certain facilities under non-cancelable operating
leases that expire at various times up to February 2013. The
facility leases require Intevac to pay for all normal
maintenance costs. In February 2004, we executed a lease
amendment for our Santa Clara facility which extended the
lease term to March 2012.
Future minimum rental payments under these leases at
December 31, 2004 are as follows (in thousands):
| |
|
|
|
|
|
2005
|
|
$ |
3,387 |
|
|
2006
|
|
|
3,486 |
|
|
2007
|
|
|
2,042 |
|
|
2008
|
|
|
1,605 |
|
|
2009
|
|
|
1,682 |
|
|
Beyond
|
|
|
4,257 |
|
| |
|
|
|
|
Total
|
|
$ |
16,459 |
|
| |
|
|
|
Gross rental expense was approximately $2,550,000, $2,940,000
and $2,873,000 for the years ended December 31, 2004, 2003
and 2002, respectively.
In 1991, we established a defined contribution retirement plan
with 401(k) plan features. The plan covers all United States
employees eighteen years and older. Employees may make
contributions by a percentage reduction in their salaries, not
to exceed the statutorily prescribed annual limit. We made cash
contributions of $280,000, $234,000 and $276,000 for the years
ended December 31, 2004, 2003 and 2002, respectively.
Employees may choose among twelve investment options for their
contributions and their share of Intevac’s contributions,
and they are able to move funds between investment options at
any time. Intevac’s common stock is not one of the
investment options. Administrative expenses relating to the plan
are insignificant.
During the first quarter of 1997, we completed an offering of
$57.5 million of our
61/2% Convertible
Subordinated Notes (the “2004 Notes”), with a
March 1, 2004 maturity date. Interest was payable each
March 1st and September 1st. The notes were
convertible into shares of Intevac’s common stock at
$20.625 per share. Expenses associated with the offering of
approximately $2.3 million were deferred. Such expenses
were amortized to interest expense over the term of the notes.
On July 12, 2002 we completed the exchange of
$36.3 million in aggregate principal amount of our 2004
Notes for $29.5 million of our new
61/2% Convertible
Subordinated Notes due 2009 (the “2009 Notes”) and
$7.6 million in cash, including $0.9 million for
accrued interest. The 2009 Notes were convertible, at the
holders’ option, into Intevac common shares at a conversion
price of $7.00 per share. $1.3 million in aggregate
principal amount of the 2004 Notes remained outstanding after
the closing of the exchange offer.
In accounting for the exchange of the convertible notes, we
wrote off $0.4 million of debt issuance costs related to
the 2004 Notes, reflecting the portion of such costs
attributable to the convertible notes exchanged. The remaining
debt issuance costs were amortized to interest expense over the
remaining life of the 2004 Notes. In connection with the
exchange offer, we incurred $0.8 million of offering costs.
Of this amount, $0.2 million represented the cash portion
of the exchange offer and was expensed during the 3 months
ended September 28, 2002. The $0.6 million balance of
the exchange offering costs were amortized to interest expense
over the life of the 2009 Notes. There was no gain or loss
associated with this transaction, as $36.3 million of 2004
Notes were exchanged for $36.3 million of cash and new
securities.
51
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
During 2002, in addition to the note exchange described above,
we repurchased $0.3 million, face value, of our 2004 Notes.
The repurchase resulted in a gain of $23,000. In accordance with
adoption of SFAS No. 145, the gain on the note
repurchase is included in other income and expense, net on the
Consolidated Statement of Operations and Comprehensive Income
(Loss).
On October 31, 2003, we issued a notice of automatic
conversion of our 2009 Notes pursuant to their terms.
$20.1 million in aggregate principal amount of these notes
was outstanding, which converted into 2,871,857 shares of
Intevac common stock at a conversion price of $7.00 per
share. The automatic conversion occurred on November 10,
2003. Prior to the issuance of the notice of automatic
conversion, $9.4 million in aggregate principal amount of
these notes had been tendered for conversion by the holders,
resulting in the issuance of 1,348,426 shares of Intevac
common stock.
On March 1, 2004, we paid off the remaining
$1.0 million of our 2004 Notes.
We have two reportable operating segments: Equipment and
Imaging. Our Equipment business designs, manufactures, markets
and services complex capital equipment used in the sputtering,
or deposition, of highly engineered thin-films of material onto
magnetic disks which are used in hard disk drives. Our Imaging
business develops and manufactures electro-optical sensors,
cameras and systems that permit highly sensitive detection of
photons in the visible and near infrared portions of the
spectrum, allowing vision in extreme low light situations.
Included in corporate activities are general corporate expenses,
less an allocation of corporate expenses to operating units
equal to 3%, 3% and 1% of net revenues in 2004, 2003 and 2002,
respectively. Assets of corporate activities include unallocated
cash and short-term investments, deferred income tax assets
(which were written off in 2001) and other assets.
|
|
|
Segment Profit or Loss and Segment Assets |
We evaluate performance and allocate resources based on a number
of factors including, profit or loss from operations and future
revenue potential. The accounting policies of the reportable
segments are the same as those described in the summary of
significant accounting policies.
|
|
|
Business Segment Net Revenues |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Equipment
|
|
$ |
60,490 |
|
|
$ |
26,748 |
|
|
$ |
27,100 |
|
|
Imaging
|
|
|
9,125 |
|
|
|
9,546 |
|
|
|
6,684 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
69,615 |
|
|
$ |
36,294 |
|
|
$ |
33,784 |
|
| |
|
|
|
|
|
|
|
|
|
52
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
Business Segment Profit & Loss |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Equipment(1)
|
|
$ |
(377 |
) |
|
$ |
(3,993 |
) |
|
$ |
(5,139 |
) |
|
Imaging(2)
|
|
|
(4,114 |
) |
|
|
(4,155 |
) |
|
|
(3,829 |
) |
|
Corporate activities
|
|
|
(758 |
) |
|
|
(2,507 |
) |
|
|
(2,321 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(5,249 |
) |
|
|
(10,655 |
) |
|
|
(11,289 |
) |
|
Interest expense
|
|
|
(55 |
) |
|
|
(1,787 |
) |
|
|
(2,981 |
) |
|
Interest income
|
|
|
634 |
|
|
|
269 |
|
|
|
284 |
|
|
Other income and expense, net
|
|
|
436 |
|
|
|
(92 |
) |
|
|
16,168 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$ |
(4,234 |
) |
|
$ |
(12,265 |
) |
|
$ |
2,182 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Includes inventory provisions of $1,263,000, $451,000 and
$847,000 in 2004, 2003 and 2002, respectively. |
| |
| (2) |
Includes inventory provisions of $112,000, $292,000 and $469,000
in 2004, 2003 and 2002, respectively. |
| |
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Equipment
|
|
$ |
19,407 |
|
|
$ |
25,462 |
|
|
Imaging
|
|
|
7,135 |
|
|
|
7,702 |
|
|
Corporate activities
|
|
|
53,080 |
|
|
|
22,811 |
|
| |
|
|
|
|
|
|
| |
Total assets
|
|
$ |
79,622 |
|
|
$ |
55,975 |
|
| |
|
|
|
|
|
|
|
|
|
Business Segment Property, Plant &
Equipment |
| |
|
|
|
|
|
|
|
|
|
| Additions |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Equipment(1)
|
|
$ |
1,024 |
|
|
$ |
1,196 |
|
|
Imaging
|
|
|
900 |
|
|
|
788 |
|
|
Corporate activities
|
|
|
402 |
|
|
|
310 |
|
| |
|
|
|
|
|
|
| |
Total additions
|
|
$ |
2,326 |
|
|
$ |
2,294 |
|
| |
|
|
|
|
|
|
|
|
| (1) |
Includes inventory transferred to fixed assets of $706 in 2004. |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Depreciation |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Equipment
|
|
$ |
561 |
|
|
$ |
456 |
|
|
$ |
1,346 |
|
|
Imaging
|
|
|
1,188 |
|
|
|
1,240 |
|
|
|
860 |
|
|
Corporate activities
|
|
|
282 |
|
|
|
267 |
|
|
|
371 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total depreciation
|
|
$ |
2,031 |
|
|
$ |
1,963 |
|
|
$ |
2,577 |
|
| |
|
|
|
|
|
|
|
|
|
53
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
Geographic Area Net Trade Revenues |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
United States
|
|
$ |
22,545 |
|
|
$ |
13,133 |
|
|
$ |
16,332 |
|
|
Far East
|
|
|
46,452 |
|
|
|
23,155 |
|
|
|
17,150 |
|
|
Europe
|
|
|
618 |
|
|
|
— |
|
|
|
301 |
|
|
Rest of World
|
|
|
— |
|
|
|
6 |
|
|
|
1 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total revenues
|
|
$ |
69,615 |
|
|
$ |
36,294 |
|
|
$ |
33,784 |
|
| |
|
|
|
|
|
|
|
|
|
Our Articles of Incorporation authorize 10,000,000 shares
of Preferred Stock. The Board of Directors has the authority to
issue the Preferred Stock in one or more series and to fix the
price, rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting
any series or the designation of such series, without further
vote or action by the shareholders.
|
|
|
Stock Option/ Stock Issuance Plans |
Our Board of Directors and our shareholders approved adoption of
the 2004 Equity Incentive Plan (the “2004 Plan”) in
2004. The 2004 Plan serves as the successor equity incentive
program to our 1995 Stock Option/ Stock Issuance Plan (the
“1995 Plan”). Upon adoption of the 2004 Plan, all
shares available for issuance under the 1995 Plan were
transferred to the 2004 Plan. The 2004 Plan permits the grant of
incentive or non-statutory stock options, restricted stock,
stock appreciation rights, performance units and performance
shares. Option price, vesting period, and other terms are
determined by the Administrator of the 2004 Plan, but the option
price shall generally not be less than 100% of the fair market
value per share on the date of grant. As of December 31,
2004, 2,558,232 shares of common stock are authorized for
future issuance under the 2004 Plan. Options granted under the
2004 Plan are exercisable upon vesting and vest over periods of
up to five years. Options currently expire no later than ten
years from the date of grant. The 2004 Plan expires no later
than March 10, 2014.
In 2003, our shareholders approved adoption of the 2003 Employee
Stock Purchase Plan (the “2003 ESPP”) which serves as
the successor to the Employee Stock Purchase Plan originally
adopted in 1995. Upon adoption of the 2003 ESPP, all shares
available for issuance under the prior plan were transferred to
the 2003 ESPP. As of December 31, 2004, 276,013 shares
of common stock are authorized for future issuance under the
2003 ESPP.
54
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
A summary of our stock option activity and related information
for the years ended December 31 follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
Weighted-Average | |
|
|
|
Weighted-Average | |
|
|
|
Weighted-Average | |
| |
|
Options | |
|
Exercise Price | |
|
Options | |
|
Exercise Price | |
|
Options | |
|
Exercise Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Outstanding — beginning of year
|
|
|
1,426,285 |
|
|
$ |
5.26 |
|
|
|
1,850,082 |
|
|
$ |
5.02 |
|
|
|
1,802,022 |
|
|
$ |
5.22 |
|
| |
Granted
|
|
|
618,000 |
|
|
|
8.30 |
|
|
|
259,000 |
|
|
|
8.03 |
|
|
|
429,800 |
|
|
|
3.19 |
|
| |
Exercised
|
|
|
(177,371 |
) |
|
|
4.83 |
|
|
|
(530,248 |
) |
|
|
5.64 |
|
|
|
(13,400 |
) |
|
|
1.46 |
|
| |
Forfeited
|
|
|
(153,959 |
) |
|
|
9.29 |
|
|
|
(152,549 |
) |
|
|
5.73 |
|
|
|
(368,340 |
) |
|
|
4.00 |
|
|
Outstanding — end of year
|
|
|
1,712,955 |
|
|
|
6.04 |
|
|
|
1,426,285 |
|
|
|
5.26 |
|
|
|
1,850,082 |
|
|
|
5.02 |
|
|
Exercisable at end of year
|
|
|
906,353 |
|
|
$ |
5.89 |
|
|
|
840,518 |
|
|
$ |
5.67 |
|
|
|
1,188,382 |
|
|
$ |
5.81 |
|
|
Weighted-average per share fair value of options granted during
the year
|
|
|
|
|
|
$ |
4.39 |
|
|
|
|
|
|
$ |
3.64 |
|
|
|
|
|
|
$ |
1.58 |
|
Outstanding and Exercisable by Price Range as of
December 31, 2004
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options Outstanding | |
|
Options Exercisable | |
| |
|
| |
|
| |
| |
|
Number | |
|
|
|
Number | |
|
|
| |
|
Outstanding as of | |
|
Weighted Average | |
|
|
|
Exercisable as of | |
|
|
| |
|
December 31, | |
|
Remaining | |
|
Weighted Average | |
|
December 31, | |
|
Weighted Average | |
| Range of Exercise Prices |
|
2004 | |
|
Contractual Life | |
|
Exercise Price | |
|
2004 | |
|
Exercise Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
$ 2.175 - $ 3.200
|
|
|
371,780 |
|
|
|
6.87 yrs |
|
|
$ |
2.80 |
|
|
|
213,933 |
|
|
$ |
2.78 |
|
|
$ 3.375 - $ 5.120
|
|
|
516,250 |
|
|
|
7.97 yrs |
|
|
$ |
4.04 |
|
|
|
215,870 |
|
|
$ |
4.05 |
|
|
$ 5.375 - $ 8.000
|
|
|
470,175 |
|
|
|
4.57 yrs |
|
|
$ |
6.40 |
|
|
|
344,800 |
|
|
$ |
6.35 |
|
|
$ 8.080 - $12.000
|
|
|
219,000 |
|
|
|
9.06 yrs |
|
|
$ |
9.92 |
|
|
|
82,625 |
|
|
$ |
10.43 |
|
|
$13.600 - $15.500
|
|
|
123,250 |
|
|
|
9.02 yrs |
|
|
$ |
14.39 |
|
|
|
36,625 |
|
|
$ |
15.18 |
|
|
$21.250 - $21.250
|
|
|
12,500 |
|
|
|
1.37 yrs |
|
|
$ |
21.25 |
|
|
|
12,500 |
|
|
$ |
21.25 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 2.175 - $21.250
|
|
|
1,712,955 |
|
|
|
6.97 yrs |
|
|
$ |
6.04 |
|
|
|
906,353 |
|
|
$ |
5.89 |
|
The provision for (benefit from) income taxes on income from
continuing operations consists of the following (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Federal:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(6,585 |
) |
| |
Deferred
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
— |
|
|
|
— |
|
|
|
(6,585 |
) |
|
State:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current
|
|
|
115 |
|
|
|
2 |
|
|
|
2 |
|
| |
Deferred
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
115 |
|
|
|
2 |
|
|
|
2 |
|
|
Foreign:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current
|
|
|
(5 |
) |
|
|
36 |
|
|
|
(9 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Total
|
|
$ |
110 |
|
|
$ |
38 |
|
|
$ |
(6,592 |
) |
| |
|
|
|
|
|
|
|
|
|
55
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The tax benefits associated with exercises of nonqualified stock
options and disqualifying dispositions of stock acquired through
the incentive stock option and employee stock purchase plans
reduced taxes currently payable for 2004, 2003 and 2002 as shown
above by $0, $0 and $0, respectively. Such benefits are credited
to additional paid-in capital when realized.
Deferred income taxes reflect the net tax effects of temporary
differences between losses reported and the carrying amounts of
assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Significant components of
our deferred tax assets computed in accordance with
SFAS No. 109 are as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
| |
Vacation accrual, rent accrual and warranty reserve
|
|
$ |
958 |
|
|
$ |
1,041 |
|
| |
Depreciation
|
|
|
1,501 |
|
|
|
1,431 |
|
| |
Inventory valuation
|
|
|
3,388 |
|
|
|
3,803 |
|
| |
Deferred income
|
|
|
375 |
|
|
|
21 |
|
| |
Research and other tax credit carry-forwards
|
|
|
698 |
|
|
|
557 |
|
| |
Federal and State NOL carry-forwards
|
|
|
12,010 |
|
|
|
9,046 |
|
| |
Other
|
|
|
1,063 |
|
|
|
836 |
|
| |
|
|
|
|
|
|
| |
|
|
19,993 |
|
|
|
16,735 |
|
|
Valuation allowance for deferred tax assets
|
|
|
(19,943 |
) |
|
|
(16,685 |
) |
| |
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$ |
50 |
|
|
$ |
50 |
|
| |
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
| |
Other
|
|
$ |
50 |
|
|
$ |
50 |
|
| |
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
$ |
50 |
|
|
$ |
50 |
|
| |
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$ |
— |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
The valuation allowance increased by $3.3 million during
2004 due to the uncertainty of realizing certain tax credit and
loss carry-forwards, and other deferred tax assets. The Federal
and State net operating loss carry-forwards of
$30.8 million and $14.0 million expire at various
dates through 2024 and 2014, respectively, if not previously
utilized.
A reconciliation of the income tax provision on income from
continuing operations at the federal statutory rate of 35% for
2004 and 34% for 2003 and 2002 to the income tax provision at
the effective tax rate is as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Income taxes (benefit) computed at the federal statutory rate
|
|
$ |
(1,472 |
) |
|
$ |
(4,159 |
) |
|
$ |
766 |
|
|
State taxes (net of federal benefit)
|
|
|
75 |
|
|
|
(434 |
) |
|
|
109 |
|
|
Research and other tax credits
|
|
|
— |
|
|
|
(44 |
) |
|
|
(142 |
) |
|
Effect of tax rate changes, permanent differences and
adjustments of prior deferrals
|
|
|
(1,751 |
) |
|
|
73 |
|
|
|
(181 |
) |
|
Valuation allowance
|
|
|
3,258 |
|
|
|
4,602 |
|
|
|
(7,144 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
110 |
|
|
$ |
38 |
|
|
$ |
(6,592 |
) |
| |
|
|
|
|
|
|
|
|
|
56
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
| 12. |
Other Accrued Liabilities |
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Accrued product warranties
|
|
$ |
909 |
|
|
$ |
534 |
|
|
Deferred income
|
|
|
865 |
|
|
|
54 |
|
|
Accrued rent expense
|
|
|
377 |
|
|
|
1,290 |
|
|
Other
|
|
|
792 |
|
|
|
765 |
|
| |
|
|
|
|
|
|
|
Total other accrued liabilities
|
|
$ |
2,943 |
|
|
$ |
2,643 |
|
| |
|
|
|
|
|
|
|
|
| 13. |
Quarterly Consolidated Results of Operations (Unaudited) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended | |
| |
|
| |
| |
|
March 27, | |
|
June 26, | |
|
Sept. 25, | |
|
Dec. 31, | |
| |
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
| |
|
As restated | |
|
As restated | |
|
As restated | |
|
As restated | |
|
Net sales
|
|
$ |
6,435 |
|
|
$ |
17,764 |
|
|
$ |
35,029 |
|
|
$ |
10,387 |
|
|
Gross profit
|
|
|
1,619 |
|
|
|
5,680 |
|
|
|
6,410 |
|
|
|
2,147 |
|
|
Net income (loss)
|
|
|
(3,360 |
) |
|
|
677 |
|
|
|
1,371 |
|
|
|
(3,032 |
) |
|
Basic earnings per share
|
|
$ |
(0.18 |
) |
|
$ |
0.03 |
|
|
$ |
0.07 |
|
|
$ |
(0.15 |
) |
|
Diluted earnings per share
|
|
|
(0.18 |
) |
|
|
0.03 |
|
|
|
0.07 |
|
|
|
(0.15 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended | |
| |
|
| |
| |
|
March 29, | |
|
June 28, | |
|
Sept. 27, | |
|
Dec. 31, | |
| |
|
2003 | |
|
2003 | |
|
2003 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Net sales
|
|
$ |
12,015 |
|
|
$ |
4,587 |
|
|
$ |
7,616 |
|
|
$ |
12,076 |
|
|
Gross profit
|
|
|
1,160 |
|
|
|
1,119 |
|
|
|
2,880 |
|
|
|
4,671 |
|
|
Net income (loss)(1)
|
|
|
(4,006 |
) |
|
|
(4,797 |
) |
|
|
(2,899 |
) |
|
|
(601 |
) |
|
Basic earnings per share
|
|
$ |
(0.33 |
) |
|
$ |
(0.39 |
) |
|
$ |
(0.24 |
) |
|
$ |
(0.04 |
) |
|
Diluted earnings per share
|
|
|
(0.33 |
) |
|
|
(0.39 |
) |
|
|
(0.24 |
) |
|
|
(0.04 |
) |
|
|
| (1) |
Net income (loss) for the three months ended December 31,
2003 includes a gain of $287,000 from the sale of the Rapid
Thermal Processing product line. |
The amounts shown for net income (loss) differ from the amounts
reported in the reports on Form 10-Q for the three months
ended March 27, 2004, June 26, 2004 and
September 25, 2004 by ($43,000), ($115,000) and $28,000,
respectively. The difference is due to the restatement discussed
in footnote 14. The impact on basic and diluted earnings
per share reported is ($0.01) for the three months ended
June 26, 2004 and $0.01 for the three months ended
December 31, 2004. There is not an impact on basic or
diluted earnings per share for the three months ended
March 27, 2004 or September 25, 2004.
During the review of our internal controls, we identified
several Imaging Technology Development contracts where revenue
had not been recognized according to contract terms during 2004.
Accordingly, we adjusted our interim financial results for 2004
to correct the misstatements. We also included in this
restatement two timing inaccuracies in reported cost of sales
and a revision to the amount of other
57
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
comprehensive income reported. These inaccuracies alone were not
material to our financial statements. The largest change to our
reported net income in any one quarter was $122,000. The change
in our reported basic and diluted earnings per share was a one
cent reduction for the three months ended June 26, 2004 and
a one cent increase for the three months ended December 31,
2004.
The restatement adjustments had the following effects on our
Consolidated Statement of Operations (in thousands, except for
per share amounts:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Six | |
|
Nine | |
| |
|
Three Months Ended | |
|
Months | |
|
Months | |
| |
|
| |
|
Ended | |
|
Ended | |
| |
|
March 27, | |
|
June 26, | |
|
Sept. 25, | |
|
Dec. 31, | |
|
June 26, | |
|
Sept. 25, | |
| |
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As reported
|
|
$ |
6,499 |
|
|
$ |
17,980 |
|
|
$ |
34,871 |
|
|
$ |
10,265 |
|
|
$ |
24,479 |
|
|
$ |
59,350 |
|
| |
Restated
|
|
|
6,435 |
|
|
|
17,764 |
|
|
|
35,029 |
|
|
|
10,387 |
|
|
|
24,199 |
|
|
|
59,228 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Increase (decrease)
|
|
|
(64 |
) |
|
|
(216 |
) |
|
|
158 |
|
|
|
122 |
|
|
|
(280 |
) |
|
|
(122 |
) |
|
Cost of net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As reported
|
|
|
4,834 |
|
|
|
12,189 |
|
|
|
28,496 |
|
|
|
8,240 |
|
|
|
17,023 |
|
|
|
45,519 |
|
| |
Restated
|
|
|
4,816 |
|
|
|
12,084 |
|
|
|
28,619 |
|
|
|
8,240 |
|
|
|
16,900 |
|
|
|
45,519 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Increase (decrease)
|
|
|
(18 |
) |
|
|
(105 |
) |
|
|
123 |
|
|
|
— |
|
|
|
(123 |
) |
|
|
— |
|
|
Other income and expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As reported
|
|
|
246 |
|
|
|
307 |
|
|
|
271 |
|
|
|
254 |
|
|
|
553 |
|
|
|
824 |
|
| |
Restated
|
|
|
249 |
|
|
|
303 |
|
|
|
264 |
|
|
|
254 |
|
|
|
552 |
|
|
|
816 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Increase (decrease)
|
|
|
3 |
|
|
|
(4 |
) |
|
|
(7 |
) |
|
|
— |
|
|
|
(1 |
) |
|
|
(8 |
) |
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As reported
|
|
|
(3,317 |
) |
|
|
792 |
|
|
|
1,343 |
|
|
|
(3,154 |
) |
|
|
(2,525 |
) |
|
|
(1,182 |
) |
| |
Restated
|
|
|
(3,360 |
) |
|
|
677 |
|
|
|
1,371 |
|
|
|
(3,032 |
) |
|
|
(2,683 |
) |
|
|
(1,312 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Increase (decrease)
|
|
|
(43 |
) |
|
|
(115 |
) |
|
|
28 |
|
|
|
122 |
|
|
|
(158 |
) |
|
|
(130 |
) |
|
Net income (loss) per share — basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As reported
|
|
|
(0.18 |
) |
|
|
0.04 |
|
|
|
0.07 |
|
|
|
(0.16 |
) |
|
|
(0.13 |
) |
|
|
(0.06 |
) |
| |
Restated
|
|
|
(0.18 |
) |
|
|
0.03 |
|
|
|
0.07 |
|
|
|
(0.15 |
) |
|
|
(0.14 |
) |
|
|
(0.07 |
) |
| |
Increase (decrease)
|
|
|
— |
|
|
|
(0.01 |
) |
|
|
— |
|
|
|
0.01 |
|
|
|
(0.01 |
) |
|
|
(0.01 |
) |
|
Net income (loss) per share — diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As reported
|
|
|
(0.18 |
) |
|
|
0.04 |
|
|
|
0.07 |
|
|
|
(0.16 |
) |
|
|
(0.13 |
) |
|
|
(0.06 |
) |
| |
Restated
|
|
|
(0.18 |
) |
|
|
0.03 |
|
|
|
0.07 |
|
|
|
(0.15 |
) |
|
|
(0.14 |
) |
|
|
(0.07 |
) |
| |
Increase (decrease)
|
|
|
— |
|
|
|
(0.01 |
) |
|
|
— |
|
|
|
0.01 |
|
|
|
(0.01 |
) |
|
|
(0.01 |
) |
58
|
|
| Item 9. |
Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure |
None.
|
|
| Item 9A. |
Controls and Procedures |
Management’s Report on Assessment of Internal Control
Over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined under Rules 13a-15(f) and 15d-15(f) promulgated
under the Securities Exchange Act of 1934, as amended. Our
internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with accounting principles
generally accepted in the United States of America. Because of
its inherent limitations, internal control over financial
reporting may not prevent or detect all misstatements or fraud.
Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefit of controls
must be considered relative to their costs. As a result of these
inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been
detected. These limitations include the realities that judgments
in decision-making can be faulty, and that breakdowns can occur
because of a simple error or mistake. As a result of these
limitations, misstatements due to error or fraud may occur or
not be detected. Accordingly, the Company’s disclosure
controls and procedures are designed to provide reasonable, not
absolute, assurance that the disclosure controls and procedures
are met. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In order to evaluate the effectiveness of internal control over
financial reporting, as required by Section 404 of the
Sarbanes-Oxley Act, management has conducted an assessment,
including testing, using the criteria in Internal
Control — Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). In the course of this evaluation, we identified three
control deficiencies that constitute material weaknesses. As a
result of these three material weaknesses in our system of
internal controls we concluded that we did not maintain
effective internal controls over our financial reporting during
2004.
A material weakness is a control deficiency (within the meaning
of PCAOB Auditing Standard No. 2), or combination of
control deficiencies, that results in there being more than a
remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected.
As of December 31, 2004, we concluded that we did not
maintain effective controls over (1) aspects of the Imaging
Business, (2) approval of inventory cycle count
adjustments, and (3) documentation related to our quarterly
review and approval of excess and obsolete inventory reserves.
Our evaluation is as follows:
|
|
| |
Imaging Business - We determined during the course of our
year-end audit that projected, rather than approved, billing
rates were used to calculate revenue for cost-plus-fixed-fee
technology development contracts. In addition, journal entries
for revenue recognition and the related documentation were not
subjected to adequate review and approval. |
| |
| |
We also determined during the course of our year-end audit that
firm fixed-price technology development contracts were not being
accounted for in accordance with U.S. GAAP for firm fixed-price
contracts. This would have resulted in an overstatement of
revenue and operating profit had it not been discovered prior to
the public release of our 2004 earnings. During the first
quarter of 2005, we retrained our accounting staff in proper
application of revenue recognition policies and implemented
policies regarding analyzing contracts for proper revenue
recognition accounting. |
| |
| |
We determined during the course of our year-end audit that a
receivable greater than one year old had not been reserved as a
bad debt. During the fourth quarter of 2004, we implemented a
bad debt policy that required receivables aged more than one
year to be fully reserved. Our review did not include unbilled
receivables and we did not establish the appropriate bad debt
reserve. This would have resulted |
59
|
|
| |
in an understatement of bad debt expense and an overstatement of
operating profit had it not been discovered prior to the public
release of our earnings. We have changed our process for
evaluating accounts receivable to ensure that all balances are
reviewed for collectibility on a regular basis. |
| |
| |
Approval of Inventory Cycle Count Adjustments —
We routinely cycle count our stockroom inventories and make
corrections to our inventory balances as a result of those cycle
counts. We determined late in 2004 that the cycle count
adjustments were being made, but without written approval by
management as required by our internal control policies.
Management authorization of cycle count adjustments is necessary
to reduce the potential of an employee using a cycle count
adjustment to conceal a theft of inventory. The requirement for
the appropriate management approval of all cycle count
adjustments was re-emphasized in December of 2004. |
| |
| |
Documentation of Excess and Obsolete Inventory Reserve
Calculation Review and Approval — We determine, on
a quarterly basis, the level of reserves required related to
excess and obsolete inventory. Excess and obsolete inventory
reserves are an estimate which requires significant judgment on
the part of management. Our Chief Financial Officer reviews and
approves these estimates on a quarterly basis. Given the
significant nature of the estimate, we determined during the
course of our internal controls evaluations that improved
documentation of those reviews was needed. We will document the
quarterly management reviews of excess and obsolete calculations
beginning with the reviews performed in the first quarter of
2005. |
Management’s assessment of the effectiveness of the
internal control over financial reporting as of
December 31, 2004 has been audited by Grant Thornton LLP,
the Company’s independent registered public accounting
firm, as stated in their report which is included at
page 61 herein.
|
|
|
| /s/ Kevin Fairbairn |
/s/ Charles B. Eddy III |
|
Changes in Internal Controls
During 2004, we made numerous changes to our internal controls
and procedures as part of our ongoing evaluation, monitoring and
development of our internal controls. However, with the
exception of the changes noted in our Management’s Report
on Assessment of Internal Control over Financial Reporting, none
of the changes in the Company’s internal control over
financial reporting identified in connection with the evaluation
of such internal control during the Company’s last fiscal
quarter materially affected, or are reasonably likely to
materially affect, the Company’s internal control over
financial reporting.
Evaluation of disclosure controls and procedures
Our management evaluated, with the participation of our Chief
Executive Officer and our Chief Financial Officer, the
effectiveness of our disclosure controls and procedures, as such
term is defined under Rule 13a-15(e) promulgated under the
Securities Exchange Act of 1934 as amended. Based on this
evaluation, our Chief Executive Officer and our Chief Financial
Officer have concluded that our disclosure controls and
procedures were not effective as of December 31, 2004 as a
result of the three material weaknesses identified above.
60
Report of Independent Registered Public Accounting Firm
On Internal Control Over Financial Reporting
Board of Directors and Shareholders
Intevac, Inc.
We have audited management’s assessment, included in the
accompanying Intevac, Inc. Management’s Report on Internal
Control Over Financial Reporting, that Intevac, Inc. did not
maintain effective internal control over financial reporting as
of December 31, 2004, because of the effect of the material
weaknesses identified in management’s assessment, based on
criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Intevac, Inc.’s management
is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on management’s assessment and an
opinion on the effectiveness of the Company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of
America. A company’s internal control over financial
reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally
accepted in the United States of America, and that receipts and
expenditures of the company are being made only in accordance
with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of
control deficiencies, that results in a more than remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. The
following material weaknesses have been identified and included
in management’s assessment:
|
|
|
| |
• |
The lack of appropriate internal controls over the Imaging
Business, |
| |
| |
• |
The approval of inventory cycle count adjustments, and |
| |
| |
• |
The documentation related to the company’s quarterly review
and approval of excess and obsolete inventory reserves. |
These material weaknesses were considered in determining the
nature, timing, and extent of audit tests applied in our audit
of the 2004 consolidated financial statements, and this report
does not affect our report dated March 22, 2005, on those
consolidated financial statements.
61
In our opinion, management’s assessment that Intevac, Inc.
did not maintain effective internal control over financial
reporting as of December 31, 2004, is fairly stated, in all
material respects, based on criteria established in Internal
Control — Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Also in
our opinion, because of the effect of the material weaknesses
described above on the achievement of the objectives of the
control criteria, Intevac, Inc. has not maintained effective
internal control over financial reporting as of
December 31, 2004, based on criteria established in
Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Intevac, Inc. as of
December 31, 2004 and 2003, and the related consolidated
statements of operations and comprehensive income (loss),
shareholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2004 and our report
dated March 22, 2005 expressed an unqualified opinion on
those financial statements.
San Jose, California
March 22, 2005
62
|
|
| Item 9B. |
Other Information |
As discussed in footnote 14, our quarterly information for
2004 has been restated.
PART III
|
|
| Item 10. |
Directors and Executive Officers of the Registrant |
The information required by this item relating to the
Company’s directors and nominees, disclosure relating to
compliance with Section 16(a) of the Securities Exchange
Act of 1934, and information regarding our code of ethics is
included under the captions “Election of Directors,”
“Section 16(a) Beneficial Ownership Reporting
Compliance, “and “Code of Ethics” in the
Company’s Proxy Statement for the 2005 Annual Meeting of
Shareholders and is incorporated herein by reference. The
information required by this item relating to the Company’s
executive officers and key employees is included under the
caption “Executive Officers and Directors” under
Item 4 in Part I of this Annual Report on
Form 10-K.
|
|
| Item 11. |
Executive Compensation |
The information required by this item is included under the
caption “Executive Compensation and Related
Information” in the Company’s Proxy Statement for the
2005 Annual Meeting of Shareholders and is incorporated herein
by reference.
|
|
| Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
Securities authorized for issuance under equity compensation
plans. The following table summarizes the number of
outstanding options granted to employees and directors, as well
as the number of securities remaining available for future
issuance, under our equity compensation plans at
December 31, 2004.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(a) | |
|
(b) | |
|
(c) | |
| |
|
Number of Securities | |
|
|
|
Number of Securities | |
| |
|
to be Issued upon | |
|
Weighted-Average | |
|
Remaining Available | |
| |
|
Exercise of | |
|
Exercise Price of | |
|
for Future Issuance | |
| |
|
Outstanding Options, | |
|
Outstanding Options, | |
|
Under Equity | |
| Plan Category |
|
Warrants and Rights | |
|
Warrants and Rights | |
|
Compensation Plans(1) | |
| |
|
| |
|
| |
|
| |
|
Equity compensation plans approved by security holders(2)
|
|
|
1,712,955 |
|
|
$ |
6.04 |
|
|
|
1,121,290 |
|
|
Equity compensation plans not approved by security holders
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,712,955 |
|
|
$ |
6.04 |
|
|
|
1,121,290 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Excludes securities reflected in column (a). |
| |
| (2) |
Included in the column (c) amount are 276,013 shares
available for future issuance under Intevac’s 2003 Employee
Stock Purchase Plan. |
The other information required by this item is included under
the caption “Ownership of Securities” in the
Company’s Proxy Statement for the 2005 Annual Meeting of
Shareholders and is incorporated herein by reference.
|
|
| Item 13. |
Certain Relationships and Related Transactions |
The information required by this item is included under the
caption “Certain Transactions” in the Company’s
Proxy Statement for the 2005 Annual Meeting of Shareholders and
is incorporated herein by reference.
63
|
|
| Item 14. |
Principal Accountant Fees and Services |
The information required by this item is included under the
caption “Fees Paid To Accountants For Services Rendered
During 2004” in the Company’s Proxy Statement for the
2005 Annual Meeting of Shareholders and is incorporated herein
by reference.
PART IV
|
|
| Item 15. |
Exhibits and Financial Statement Schedules |
(a) List of Documents filed as part of this Annual Report
on Form 10-K.
1. The following consolidated financial statements of
Intevac, Inc. are filed in Part II, Item 8 of this
Report on Form 10-K:
|
|
| |
Report of Grant Thornton LLP, Independent Registered Public
Accounting Firm |
| |
| |
Consolidated Balance Sheets — December 31, 2004
and 2003 |
| |
| |
Consolidated Statements of Operations and Comprehensive Income
(Loss) for the years ended December 31, 2004, 2003 and 2002 |
| |
| |
Consolidated Statement of Shareholders’ Equity for the
years ended December 31, 2004, 2003 and 2002 |
| |
| |
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002 |
| |
| |
Notes to Consolidated Financial Statements — Years
Ended December 31, 2004, 2003 and 2002 |
2. Financial Statement Schedules.
The following financial statement schedule of Intevac, Inc. is
filed in Part IV, Item 14(a) of this Annual Report on
Form 10-K:
|
|
| |
Schedule II — Valuation and Qualifying Accounts |
All other schedules have been omitted since the required
information is not present in amounts sufficient to require
submission of the schedule or because the information required
is included in the consolidated financial statements or notes
thereto.
3. Exhibits
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Description |
| |
|
|
| |
***2 |
.1 |
|
Asset Purchase Agreement between Intevac, Inc. and Photon
Dynamics, Inc. dated as of October 22, 2002 |
| |
*3 |
.1 |
|
Amended and Restated Articles of Incorporation of the Registrant |
| |
*3 |
.2 |
|
Bylaws of the Registrant |
| |
*****4 |
.4 |
|
Registration Rights Agreement, dated January 16, 2004,
between the Company, Redemco, LLC and Foster City LLC |
| |
*10 |
.1+ |
|
The Registrant’s 1991 Stock Option/Stock Issuance Plan |
| |
*10 |
.2+ |
|
The Registrant’s 1995 Stock Option/Stock Issuance Plan, as
amended |
| |
*10 |
.3+ |
|
The Registrant’s Employee Stock Purchase Plan, as amended |
| |
******10 |
.4+ |
|
The Registrant’s 2004 Equity Incentive Plan |
| |
**10 |
.5 |
|
Lease, dated February 5, 2001 regarding the space located
at 3560, 3570 and 3580 Bassett Street, Santa Clara,
California |
| |
10 |
.6 |
|
First Amendment to Lease, dated February 23, 2004 regarding
the space at 3560, 3570 and 3580 Bassett Street,
Santa Clara, California |
| |
*10 |
.7 |
|
601 California Avenue LLC Limited Liability Operating Agreement,
dated July 28, 1995 |
| |
*10 |
.8+ |
|
The Registrant’s 401(k) Profit Sharing Plan |
64
| |
|
|
|
|
| Exhibit | |
|
|
| Number | |
|
Description |
| | |
|
|
| |
****10 |
.9+ |
|
The Registrant’s 2005 Executive Incentive Plan |
| |
21 |
.1 |
|
Subsidiaries of the Registrant |
| |
23 |
.1 |
|
Consent of Independent Registered Public Accounting Firm |
| |
24 |
.1 |
|
Power of Attorney (see page 66) |
| |
31 |
.1 |
|
Certification of President and Chief Executive Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
31 |
.2 |
|
Certification of Vice-President, Finance and Administration,
Chief Financial Officer, Treasurer and Secretary Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
32 |
.1 |
|
Certifications Pursuant to U.S.C. 1350, adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
|
|
|
*
|
|
Previously filed as an exhibit to the Registration Statement on
Form S-1 (No. 33-97806) |
|
**
|
|
Previously filed as an exhibit to the Company’s Annual
Report on Form 10-K for the year ended December 31,
2000 |
|
***
|
|
Previously filed as an exhibit to the Company’s Report on
Form 8-K filed November 14, 2002 |
|
****
|
|
Previously filed as an exhibit to the Company’s Report on
Form 8-K filed February 7, 2005 |
|
*****
|
|
Previously filed as an exhibit to the Company’s Annual
Report on Form 10-K for the year ended December 31,
2003 |
|
******
|
|
Previously filed as an Exhibit to the Company’s Proxy
Statement filed on March 31, 2004 |
|
+
|
|
Management compensatory plan or arrangement required to be filed
as an exhibit pursuant to Item 15(c) of Form 10-K |
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on March 31, 2005.
|
|
|
| |
By: |
/s/ CHARLES B. EDDY III |
|
|
| |
|
| |
Charles B. Eddy, III |
| |
Vice President, Finance and Administration, |
| |
Chief Financial Officer, Treasurer and Secretary |
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(Principal Financial and Accounting Officer) |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Kevin Fairbairn
and Charles B. Eddy III, and each of them, as his true and
lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Report
on Form 10-K, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as
fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
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|
|
|
|
|
|
| Signature |
|
Title |
|
Date |
| |
|
|
|
|
| |
/s/ KEVIN FAIRBAIRN
(Kevin
Fairbairn) |
|
President, Chief Executive Officer and Director (Principal
Executive Officer) |
|
March 31, 2005 |
| |
/s/ NORMAN H. POND
(Norman
H. Pond) |
|
Chairman of the Board |
|
March 31, 2005 |
| |
/s/ CHARLES B.
EDDY III
(Charles
B. Eddy III) |
|
Vice President, Finance and Administration, Chief Financial
Officer Treasurer and Secretary (Principal Financial and
Accounting Officer) |
|
March 31, 2005 |
| |
/s/ DAVID DURY
(David
Dury) |
|
Director |
|
March 31, 2005 |
| |
/s/ STANLEY J. HILL
(Stanley
J. Hill) |
|
Director |
|
March 31, 2005 |
66
| |
|
|
|
|
|
|
| Signature |
|
Title |
|
Date |
| |
|
|
|
|
| |
/s/ DAVID N. LAMBETH
(David
N. Lambeth) |
|
Director |
|
March 31, 2005 |
| |
/s/ ROBERT LEMOS
(Robert
Lemos) |
|
Director |
|
March 31, 2005 |
| |
/s/ ARTHUR L. MONEY
(Arthur
L. Money) |
|
Director |
|
March 31, 2005 |
67
SCHEDULE II — VALUATION AND QUALIFYING
ACCOUNTS
INTEVAC, INC.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Additions (Reductions) | |
|
|
|
|
| |
|
|
|
| |
|
|
|
|
| |
|
|
|
Charged | |
|
Charged | |
|
|
|
|
| |
|
Balance at | |
|
(Credited) to | |
|
(Credited) | |
|
|
|
Balance at | |
| |
|
Beginning | |
|
Costs and | |
|
to Other | |
|
Deductions- | |
|
End of | |
| Description |
|
of Period | |
|
Expenses | |
|
Accounts | |
|
Describe | |
|
Period | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Year ended December 31, 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Allowance for doubtful accounts
|
|
$ |
225 |
|
|
$ |
73 |
|
|
$ |
— |
|
|
$ |
29 |
(1) |
|
$ |
269 |
|
| |
|
Inventory provisions
|
|
|
12,661 |
|
|
|
1,316 |
|
|
|
(229 |
) |
|
|
4,189 |
(2) |
|
|
9,559 |
|
|
Year ended December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Allowance for doubtful accounts
|
|
$ |
269 |
|
|
$ |
(143 |
) |
|
$ |
6 |
|
|
$ |
110 |
(1) |
|
$ |
22 |
|
| |
|
Inventory provisions
|
|
|
9,559 |
|
|
|
743 |
|
|
|
588 |
|
|
|
698 |
(2) |
|
|
10,192 |
|
|
Year ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Allowance for doubtful accounts
|
|
$ |
22 |
|
|
$ |
218 |
|
|
$ |
(23 |
) |
|
$ |
— |
|
|
$ |
217 |
|
| |
|
Inventory provisions
|
|
|
10,192 |
|
|
|
1,375 |
|
|
|
(121 |
) |
|
|
1,583 |
(2) |
|
|
9,863 |
|
|
|
| (1) |
Write-offs of amounts deemed uncollectible. |
| |
| (2) |
Write-off of inventory having no future use or value to the
Company |
68
EXHIBIT INDEX
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Description |
| |
|
|
| |
***2 |
.1 |
|
Asset Purchase Agreement between Intevac, Inc. and Photon
Dynamics, Inc. dated as of October 22, 2002 |
| |
*3 |
.1 |
|
Amended and Restated Articles of Incorporation of the Registrant |
| |
*3 |
.2 |
|
Bylaws of the Registrant |
| |
*****4 |
.4 |
|
Registration Rights Agreement, dated January 16, 2004,
between the Company, Redemco, LLC and Foster City LLC |
| |
*10 |
.1+ |
|
The Registrant’s 1991 Stock Option/Stock Issuance Plan |
| |
*10 |
.2+ |
|
The Registrant’s 1995 Stock Option/Stock Issuance Plan, as
amended |
| |
*10 |
.3+ |
|
The Registrant’s Employee Stock Purchase Plan, as amended |
| |
******10 |
.4+ |
|
The Registrant’s 2004 Equity Incentive Plan |
| |
**10 |
.5 |
|
Lease, dated February 5, 2001 regarding the space located
at 3560, 3570 and 3580 Bassett Street, Santa Clara,
California |
| |
10 |
.6 |
|
First Amendment to Lease, dated February 23, 2004 regarding
the space at 3560, 3570 and 3580 Bassett Street,
Santa Clara, California |
| |
*10 |
.7 |
|
601 California Avenue LLC Limited Liability Operating Agreement,
dated July 28, 1995 |
| |
*10 |
.8+ |
|
The Registrant’s 401(k) Profit Sharing Plan |
| |
****10 |
.9+ |
|
The Registrant’s 2005 Executive Incentive Plan |
| |
21 |
.1 |
|
Subsidiaries of the Registrant |
| |
23 |
.1 |
|
Consent of Independent Registered Public Accounting Firm |
| |
24 |
.1 |
|
Power of Attorney (see page 65) |
| |
31 |
.1 |
|
Certification of President and Chief Executive Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
31 |
.2 |
|
Certification of Vice-President, Finance and Administration,
Chief Financial Officer, Treasurer and Secretary Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
32 |
.1 |
|
Certifications Pursuant to U.S.C. 1350, adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
|
|
|
*
|
|
Previously filed as an exhibit to the Registration Statement on
Form S-1 (No. 33-97806) |
|
**
|
|
Previously filed as an exhibit to the Company’s Annual
Report on Form 10-K for the year ended December 31,
2000 |
|
***
|
|
Previously filed as an exhibit to the Company’s Report on
Form 8-K filed November 14, 2002 |
|
****
|
|
Previously filed as an exhibit to the Company’s Report on
Form 8-K filed February 7, 2005 |
|
*****
|
|
Previously filed as an exhibit to the Company’s Annual
Report on Form 10-K for the year ended December 31,
2003 |
|
******
|
|
Previously filed as an Exhibit to the Company’s Proxy
Statement filed on March 31, 2004 |
|
+
|
|
Management compensatory plan or arrangement required to be filed
as an exhibit pursuant to Item 15(c) of Form 10-K |
69